Module 8 • Operations management


The following assumptions are made with this system: • Demand for the product is constant. • Lead-time (time from ordering to receipt) is constant. • Price per unit stays the same. • Inventory holding costs are based on average inventory.


The following equation explains all the costs linked to inventory: =


Total annual cost


Or TC


Annual purchase cost


= DC +


Annual ordering costs


+


D S Q


Where: D = C = Q = S = R = L = H = d =


+


+


Annual holding costs


Q H 2


Demand(annual)


Cost per unit (Rand) Quantity to be ordered


Set-up cost or cost of placing an order Reorder point Lead time


Annual holding and storage cost per unit Daily demand


The Economical Order Quantity (Q) equation is: Q


=


2DS H


To calculate the reorder: R


= dL


Example 1 1. Find the economic order quantity and the reorder point, given the data below: 2. What is the total annual cost?


Annual demand


Aver. daily demand Ordering costs Holding costs Lead time


Cost per unit


= = = = = =


1 000 units 1 000/365


R5 per order


R1.25 per unit per year 5 days R12.50


157


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