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##### See the attached word Document for the question re...

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See the attached word Document for the question regarding Inventory/// I posted in this box the same info from the word document also. Inventories represent a considerable investment for every organization: thus, it is important that they be managed well. Excess inventories can indicate poor financial and operational management. On the other hand, not having inventory when it is needed can also result in business failure. The two basic inventory decisions that managers face are how much to order or produce for additional inventory, and when to order or produce it to minimize total inventory cost, which consists of the cost of holding inventory and the cost of ordering it from the supplier. Holding costs, or carrying costs, represent costs associated with maintaining inventory. These costs include interest incurred or the opportunity cost of having capital tied up in inventories; storage costs such as insurance, taxes, rental fees, utilities, and other maintenance costs of storage space; warehousing or storage operation costs, including handling, recordkeeping, information processing, and actual physical inventory expenses; and costs associated with deterioration, shrinkage, obsolescence, and damage. Total holding costs are dependent on how many items are stored and for how long they are stores. Therefore, holding costs are expressed in terms of dollars associated with carrying one unit of inventory for one unit of time. Ordering costs represent costs associated with replenishing inventories. These costs are not dependent on how many items are ordered at a time, but on the number of orders that are prepared. Ordering costs include overhead, clerical work, data processing, and other expenses that are incurred in searching for supply sources, as well as costs associated with purchasing, expediting, transporting, receiving, and inspecting. It is typical to assume that the ordering cost is constant and is expressed in terms of dollars per order. For a manufacturing company that you are consulting for, managers are unsure about making inventory decisions associated with a key engine component. The annual demand is estimated to be 15,000 units and is assumed to be constant throughout the year. Each unit costs $80. The companys accounting department estimates that its opportunity cost for holding this item in stock for one year is 18% of the unit value. Each order placed with the supplier costs $220. The companys policy is to place a fixed order for Q units whenever the inventory reaches a predetermined reorder point that provides sufficient stock to meet demand until the suppliers order can be shipped and received. As consultant, your task is to develop and implement a decision model to help them arrive at the best decision. As a guide, consider the following: There are seven questions provided and the answers are provided for question 1 and 2. Also the data table has been provided for question number 4 per the tutors request. Numbers 3 thru 7 need to be completed. Hopeffuly this helps. The questions 1-7 are in bold Calibri 14 Font. 1.Define the data, uncontrollable inputs, and decision variables that influence total inventory cost. Answer The raw or unorganized form of information is referred as data. Data are the uncontrollable inputs .All data related to the model must be specified before taking any decision. Uncontrollable inputs are those inputs which affects both the objective function and constraints of the problem. In this problem uncontrollable inputs are Annual Demand = 15,000 units Parameters; Unit Cost = $80 Order Cost per order = $220 Carrying Cost Rate = 18 % Carrying Cost per Unit = $80 * 18% =$14.4 Decision Variable Economic Ordering Quantity = Q = Carrying cost per unit = $14.4 =677 units 2. Develop mathematical functions to compute the annual ordering cost and annual holding cost based on average inventory held throughout the year in order to arrive at a model for total cost. An Inventory Management Decision Model Inventories represent a considerable investment for every organization: thus, it is important that they be managed well. Excess inventories can indicate poor financial and operational management. On the other hand, not having inventory when it is needed can also result in business failure. The two basic inventory decisions that managers face are how much to order or produce for additional inventory, and when to order or produce it to minimize total inventory cost, which consists of the cost of holding inventory and the cost of ordering it from the supplier. Holding costs, or carrying costs, represent costs associated with maintaining inventory. These costs include interest incurred or the opportunity cost of having capital tied up in inventories; storage costs such as insurance, taxes, rental fees, utilities, and other maintenance costs of storage space; warehousing or storage operation costs, including handling, recordkeeping, information processing, and actual physical inventory expenses; and costs associated with deterioration, shrinkage, obsolescence, and damage. Total holding costs are dependent on how many items are stored and for how long they are stores. Therefore, holding costs are expressed in terms of dollars associated with carrying one unit of inventory for one unit of time. Ordering costs represent costs associated with replenishing inventories. These costs are not dependent on how many items are ordered at a time, but on the number of orders that are prepared. Ordering costs include overhead, clerical work, data processing, and other expenses that are incurred in searching for supply sources, as well as costs associated with purchasing, expediting, transporting, receiving, and inspecting. It is typical to assume that the ordering cost is constant and is expressed in terms of dollars per order. For a manufacturing company that you are consulting for, managers are unsure about making inventory decisions associated with a key engine component. The annual demand is estimated to be 15,000 units and is assumed to be constant throughout the year. Each unit costs $80. The companys accounting department estimates that its opportunity cost for holding this item in stock for one year is 18% of the unit value. Each order placed with the supplier costs $220. The companys policy is to place a fixed order for Q units whenever the inventory reaches a predetermined reorder point that provides sufficient stock to meet demand until the suppliers order can be shipped and received. As consultant, your task is to develop and implement a decision model to help them arrive at the best decision. As a guide, consider the following: Solution: Annual Demand = 15,000 units Cost of each unit = $ 80 Holding Cost = 18% of unit value Ordering Cost = $ 220 per order For implementation of a good decision model regarding inventory after considering all type costs assisted to it such as: holding cost and ordering cost, concept of EOQ is applied. EOQ (Economic Order Quantity) portrays time required for reorder when organization arrives to this economic order quantity. This concept minimizes the all risks and cost pertaining to the inventory and states the instant of reordering the quantity. So for the perfect management of the inventory level, management should adopt this method as decision model as it eliminates most of the risks and reduces the costs regarding inventory. Thus, As per EOQ the reorder level quantity will be: EOQ = ((2 X Annual Demand X Ordering Cost) / Holding Cost)) 1 /2 Accordingly, EOQ = ((2 X 15,000 X 220) / (80 X 18%)) 1 / 2 EOQ = 677 units Hence this quantity states that this manufacturing company should reorder the quantity when it has 677 units. So, it will be appropriate for the company and it also helps in assisting a better inventory management decision model. 2. Develop mathematical functions to compute the annual ordering cost and annual holding cost based on average inventory held throughout the year in order to arrive at a model for total cost. Ans: Mathematically, costs related to inventory are computed in the following manner: 1) Annual ordering cost = Ordering cost per order X Number of orders in a year 2) Holding cost = Holding cost per unit X Average inventory throughout the year (Average inventory throughout the year = (Opening inventory + Closing inventory) / 2 Thus, total cost will be sum of annual ordering cost and holding cost and it can be presented in mathematical way as prescribed in the following manner: Total cost of inventory = Annual ordering cost + Holding cost 3. Implement your model on a spread sheet. 4.Use data tables to find an approxiamte order quantity that results in the smallest total cost. Before the tutor asked for the data table for #4//SEE BELOW Data Table for order quantity and costs Question # 4 677 $9,748.85 550 $9,960.00 575 $9,879.13 600 $9,820.00 625 $9,780.00 650 $9,756.92 675 $9,748.89 700 $9,754.29 725 $9,771.72 750 $9,800.00 775 $9,838.06 800 $9,885.00 5. Use solver to veryify your results. 6. Conduct what if analysis to study the sensitivity of total cost to changes in the model parameters. 7. Explain results and analysis in a memo to the vice president of operations.

Paper#13294 | Written in 18-Jul-2015

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