0:52

Compute the economic order quantity which would answer the question, how

Â much to order and when you are following the continuous review inventory system.

Â What is our total annual cost associated with ordering using the EOQ, which would

Â give you a comparison across our current policy and the policy using EOQ.

Â And then, if there's a lead time of two weeks and if there's a standard deviation

Â given to you, what would be the reorder point given a certain service factor

Â associated with a cycle service level of 90%.

Â That was a question for reorder point.

Â And then what would be the decision?

Â How would you go about implementing this kind of an inventory system or

Â how would been to go about implementing.

Â So what he noticed was you were also given the table of demand,

Â although you didn't really need it, you could infer the average demand based on

Â the information that you had in the text.

Â But you were given a table of demand.

Â And I put it in there from the point of view of if you were interested,

Â you could even calculate the standard deviation and

Â the average based on the demand that's in there.

Â So to make it real that's how you would get the average and that's how you would

Â get standard deviation based on data that you would have.

Â In this case you have the data given to you.

Â Anyway, so let's start with the first question of given her current

Â policy of ordering a certain quantity every time she places an order.

Â What would be her total cost of inventory management.

Â So she was ordering 2,600 units every time she placed an order, and

Â her annual demand for the four kiosks that she had at the mall were 10,400 units.

Â So that's the annual demand, 2,600 units being ordered every time she

Â placed an order, and therefore that gave you the total number of orders.

Â 10,400 divided by 2,600 gives you a total number of orders

Â in a year multiply that by the cost of ordering per order is $200 and

Â that gives you the ordering cost over a year of $800.

Â So there were a total of four orders, she was only placing four orders in a year,

Â each cost her $200 and the ordering cost was $800.

Â Now for the holding cost,

Â there was a little bit of additional information that was given to you over and

Â above the traditional percentage that we associate with holding cost.

Â So there was a 11% holding cost up on a cost price

Â of 50 dollars so that was simple 11.11 times $50.

Â But there was also this insurance costs that was given off a one

Â cent per week and 52 weeks in a year, so one cent times 52 weeks.

Â 3:44

Now, the thing that you want to keep in mind here,

Â based on looking at something like this.

Â Or the questions that you should be asking when you see a cost that's given to you

Â is should we include this in the holding cost, or should we not include this?

Â And what would be the basis for including something In the holding cost.

Â And for that, you should think about,

Â is this going to be affected by the quantity that we hold?

Â So, for example, if you're paying rent for your shop.

Â And that is not affecting, or

Â that is not going to be based on the quantity that you hold.

Â You're not going to take that rent and

Â try to associate it with the holding cost with the inventory that you're holding.

Â If you have a certain degree of theft, you're losing a phone per week.

Â Now that is, you're losing a phone per week based on some reason.

Â If you're losing a phone per week, or you're losing a phone every 10 weeks, and

Â it's based on either being stolen or

Â depreciation from it being a showpiece, a showroom piece, that people get to try.

Â That's not something that's going to vary based on the inventory that

Â you're holding, so that should not be included in holding costs.

Â So those are the things that you want to keep in mind from a practical perspective.

Â What should you include and what you should not include in your holding cost.

Â But here, it was clear that there was

Â 5:27

for a single phone over a year and then you, so

Â it's a cost of if you were to hold a phone for a year, that would be the cost of it.

Â And then you multiply by the average inventory.

Â And in this case the average inventory would be 2600 divided by two.

Â The assumption that is implied in this 2600 divided by two

Â is that when she's buying 2,600,

Â there's a continuous depletion of that 2,600 over the period

Â that it depletes to zero and then she gets another 2,600.

Â So we take the average of the starting and the ending, being 2,600 and

Â zero, and then the average works out to 1,300.

Â So based on that you get total holding cost for a year of $7,826.

Â So total cost of $8,626.

Â From this you can get a sense of that this must be far off

Â from EOQ, the 2600 units order quantity would be far off from EOQ.

Â Because what should happen If she was ordering something close to an EOQ,

Â what would have happened is that the ordering cost over a year

Â would have been close to the holding cost over a year.

Â So here it's quite far apart, 800 versus 7,826, so

Â it's telling you that hot water quantity is going to be far off from the EOQ.

Â So lets take the next step and actually compute what the EOQ is.

Â So for that we have the annual demand, we have the set up cost,

Â the annual demand is 10,400 units, the set up cost is 200 units.

Â And you divide that by the holding cost.

Â The holding cost is calculated separately for you up there.

Â Although we calculated it earlier as well, on the previous slide, $6.2, so

Â you take that calculation and you get 831.28 units.

Â Since you're talking cellphones here, decimal points are not going to have

Â any meaning, so you are going to say, "We're going to round it to 831 units".

Â Now, if you remember that the EOQ is robust to the Q star

Â moving from Q star a little bit to the left or to the right.

Â So, you're going a above or below the optimal quantity,

Â a little bit is not going to affect total cost too much.

Â And if you want to see how it effects you can even make a spreadsheet and

Â keep calculating ordering cost and holding cost at different quantities above and

Â below 831.

Â And you'll be able to see how much difference it makes

Â in the total cost when you move away from that.

Â But that wasn't part of the question so

Â let's move on to what would be the total cost based on this EOQ.

Â What would be the total annual cost of inventory management associated with

Â using the EOQ as to decide how much to order.

Â So, if you take the ordering costs separately and the holding

Â cost separately, for the ordering cost you need a total number of orders.

Â So total number of orders would be 10,400 of annual demand,

Â divide by 831 units that she would order every time she would place an order.

Â You multiply that by the order cost of ordering every time you order, or

Â every time she orders and that works out to $2,503.

Â Holding cost would be based on $6.2 per unit.

Â Annual cost of holding a unit for a year is $6.2.

Â You multiply that by average by inventory and

Â once again the average inventory is going to be simply Q divided

Â by 2 giving the assumption that we talked about a little bit earlier.

Â And that cost works out to 2,501.

Â So 2,503, 2,501 you notice that they are close to each other, subject to rounding,

Â they should be close to each other to the extent of a few decimals.

Â So if you would have taken exactly the order quantity that we got from the EOQ,

Â you may have got Even closer numbers than 2501, 2503.

Â Nevertheless, the total cost works out to $5,004.

Â Now you could have used the other formula that we had talked about

Â associated with EOQ which is under square root of

Â two times the annual demand times the setup cost times the annual holding cost.

Â And you would have got the exact same number and you can check that,

Â you would get approximately 5,004 as the total cost using that formula as well.

Â 10:04

So given that we have this decision of if binto is going

Â to follow the continuous review system, and she's going to use the EOQ to decide

Â how much to order, how would she decide when to order?

Â And for that, you were given some addition information to come up with her ROP,

Â her re-order point, so when would she place an order?

Â She would place an order by continuously reviewing her inventory and

Â whenever it reached this particular point, she would place an order.

Â How would you come up with the reorder point?

Â Well, first we need the lead time.

Â So, the lead time that we have here is given to us as two weeks.

Â We already knew the average weekly demand of 20 units.

Â How did we know that?

Â You can get to it multiple ways.

Â You can take the data and compute the average or

Â you can say there were 10,400 units and being demanded for the year.

Â And therefore you can come up with a weekly demand from that as well.

Â So the average weekly demand is 200 units and

Â then you take the demand during lead time for two weeks is going to be 400 units.

Â The safety stock that you would calculate based on the idea that

Â she wants to cover up to 90% of the demand during the lead time.

Â So we have a multiplier of 1.28

Â coming from a level of 90% service that she wants to maintain.

Â We have the standard deviation that is computed as 29 based on the data

Â that you have but the standard deviation is also given to you so

Â you could have used 29 there.

Â And then you take under square root of two to convert this weekly standard deviation

Â to standard deviation during lead times so multiply that by square root of two and

Â you get 52.49 for the safety stock.

Â So what do we have here?

Â We have a demand during lead time of 400 units,

Â we have safety stock of 52.49 units, so the reorder points works

Â out to demand during lead time plus safety stock works out to 452 units.

Â