The goal of this case study was to gain a further understanding and application skills of supply chain management. This case evaluated two inventory models, Fixed-Order-Period Inventory model and Perpetual Inventory model, to obtain cost-based analysis of the company's inventory policies.
We have been given the weekly demand and the lead time (3 weeks) for the typical DES product. There is some variation in the weekly demand but there is no particular wild variation. We have also been given a number of inventory-related cost factors: cost/unit, order cost, tax rate and capital investment ($235, 000.00). Additional data is also given on service level (98.5%), the ratio of cost savings, and depreciation over an 8-year horizon.
We assumed that: (1) order cost is fixed for any order quantity, (2) fixed cost associated with holding inventory and shipping cost are insignificant, and (3) weekly demand is constant.
Fixed-Order-Period Inventory Models
We evaluate the cost trade-offs involved in Fixed-Order-Period Inventory Model for increasing length of order cycles (in the range of three through eight weeks durations).
In these models, we assumed that inventory is counted only at the time specified for review. The service level defines the amount of safety stock that we should hold.
The Z value is 2.17 at 98.5% (Normal Table Value for this service level one-tailed). Here, the demand is randomly distributed about a mean
The quantity is a product of average weekly demand and the length of the order cycle. Exhibit 1 shows the computation of the Total Cost.
Total Cost = Ordering Cost + Holding Cost
Ordering cost= 2580(given)*number of orders/yr
Holding cost= [(order size)/2 + Safety stock]*holding cost/unit
We find that for the Fixed-Order-Period Inventory model, Total Cost is minimized when the duration of the ordering cycle is seven (7)...