Inventory control

Question 1

How is EOQ calculated?

Answer 1

Ch

Where Co = cost per order
D = annual demand
Ch = cost of holding one unit for one year

Question 2

What are the 5 steps to deal with EOQ where there are quantity discounts on offer?

Answer 2

1 - calculate EOQ ignoring discounts

2 - if the EOQ is below the quantity qualifying for a discount, calculate the total annual inventory cost arising from using the EOQ

3 - recalculate the total annual inventory cost using the order size required to obtain each discount

4 - compare the costs of steps 2 and 3 and select the minimum cost alternative

5 - repeat for all discount levels

Question 3

How is reorder level calculated where demand and leadtime are known?

Answer 3

ROL is the demand required in the leadtime. IE if leadtime is 5 weeks and weekly demand is 10 the reorder level would be 50

Question 4

How is reorder level calculated where demand and leadtime are variable?

Answer 4

Use max demand and max leadtime