Model Answer
0 min readIntroduction
Inventory management is a critical aspect of operations management, directly impacting a company’s profitability and customer satisfaction. Efficient inventory control aims to minimize the total inventory costs, which include ordering costs and carrying costs. UPD Manufacturing, producing healthcare appliances, needs to optimize its inventory policy for the digital display unit, a crucial component sourced externally. This question assesses the ability to apply quantitative techniques to determine the total cost associated with the current ordering policy, providing a baseline for potential improvements. Understanding the trade-off between ordering and carrying costs is fundamental to effective inventory management.
Understanding the Problem
UPD Manufacturing orders digital display units every six weeks. The ordering cost is ₹40 per order, and the weekly carrying cost is ₹0.08 per unit. The demand is normally distributed with a mean of 90 units per week and a standard deviation of 5 units. The lead time (time taken for delivery) is one week.
Calculations
1. Annual Demand (D)
Annual demand is calculated as the average weekly demand multiplied by the number of working weeks in a year.
D = 90 units/week * 52 weeks/year = 4680 units/year
2. Ordering Cost (S)
The ordering cost per order is given as ₹40.
3. Carrying Cost (H)
The weekly carrying cost per unit is ₹0.08. Therefore, the annual carrying cost per unit is:
H = ₹0.08/week * 52 weeks/year = ₹4.16/unit/year
4. Number of Orders per Year (N)
The company orders every six weeks, so the number of orders per year is:
N = 52 weeks/year / 6 weeks/order = 8.67 orders/year (approximately 9 orders)
5. Total Ordering Cost
Total ordering cost is the number of orders per year multiplied by the ordering cost per order.
Total Ordering Cost = N * S = 9 orders * ₹40/order = ₹360
6. Average Inventory Level
Since orders are placed every six weeks and the lead time is one week, the average inventory level can be estimated. However, a more precise calculation requires considering the reorder point and safety stock. For simplicity, and given the information provided, we can approximate the average inventory as half the demand during the ordering and lead time.
Demand during ordering and lead time = 7 weeks * 90 units/week = 630 units
Average Inventory = 630 units / 2 = 315 units
7. Total Carrying Cost
Total carrying cost is the average inventory level multiplied by the annual carrying cost per unit.
Total Carrying Cost = 315 units * ₹4.16/unit/year = ₹1310.40
8. Total Inventory Cost
Total inventory cost is the sum of the total ordering cost and the total carrying cost.
Total Inventory Cost = Total Ordering Cost + Total Carrying Cost = ₹360 + ₹1310.40 = ₹1670.40
Therefore, the sum total of ordering and inventory carrying costs for the digital display unit, with the present ordering policy, is ₹1670.40.
Conclusion
The current inventory policy results in a total cost of ₹1670.40 annually. This calculation provides a baseline for evaluating potential improvements. Applying the Economic Order Quantity (EOQ) model could potentially reduce these costs by optimizing the order quantity and frequency. Further analysis, including consideration of demand variability and supplier reliability, is recommended to refine the inventory strategy and enhance operational efficiency for UPD Manufacturing.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.