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Joe needs to purchase malt for his micro-brew production. His supplier charges $35 per delivery [no matter how much is delivered] and $1.20 per gallon. Joe’s annual holding cost per unit is 35% of the dollar value of the unit Joe uses 5,000 gallons of malt per week. Assume Joe operates 52 weeks a year and zero lead time. How many gallons should Joe order from his supplier with each order? What is the cycle length? What is the reorder level? Suppose lead time from the supplier is two weeks. How does his inventory policy (i.e. order quantity and reorder level) change from your answer to the previous question?
Expert Answer
Answer:-
K = $35, p = $1.20/gallon
annual h = (35%/year) x ($1.20/gallon) = $0.42/year per gallon
R = 5000gallon/week = 5000gallon/week x 52week/year = 260,000gallon/year
EOQ = sqrt(2KR/h) = sqrt(35500052/0.42)=6583 gallons.
No. of orders per year = (R/Q) = 260,000/3800 = 68.42 orders/year
Order Cycle Time = 52 / 68.42 = 0.76 weeks
As there is no lead time so reorder level will be 5000 Gallon.
