Assignment – 2

on

Case study on Inventory management

Submitted in partial fulfillment
of the requirements for the course
MBA C419
by
NAME : J.B.J.Benjamin Dineshkar ID No:
2009H149049U
MBA

BITS, PILANI - DUBAI

Dubai International Academic City, Dubai, UAE
26th December 2010
Inventory Management -CYCLE
MANUFACTURER
 Here we assume a company “ABC” wants manufacture Dirt Road Cycles.
The company had employed a market research consultants to get an
idea of the annual demand of their cycles. The consultants came up with
a rough estimate of 50,000 cycles which was a very orthodox figure.
Thus, ABC decided to go on this forecast of 50,000 and produce that
much for a year.


 Now, the top management of the company decided to produce the tires for
the company by themselves but purchase the cycle bodies from a
supplier.

M a n uf a ct
ure
-
Body/Fram
e

Pur cha
se
-Tires
PRODUCTION
 The company had decided to produce the tires for the cycles. The
management estimates that 1% of the tires are damaged during
the assembly process. There is a 20% of the total demand to be
produced as spare tires which customers buy if they have their
tires damaged.
◦ Each cycle requires 2 To t ake care of dam age
◦ t ires t ire Spare
t ires
◦ DEMAND = 2*50,000 + 0.01 * 50,000 + 0.2 * 50,000
 = 110,500 tires / year

They incur an annual holding cost of Dhs.8 per t ire and a set -up
cost for each product ion cycle of Dhs.500
H old in gCost , H = D h s. 8 p e r t ir e / y e a r
Se t -up Cost , S = D hs. 5 0 0
PRODUCTION
 The tire production machine produces a daily tire capacity of 500
tires.


◦ Therefore, p = 500 wheels / day



 Now, calculating the daily tire usage of the company. The company
has an annual number of working days of 250.


◦ Therefore ,
 Usage , u = Demand / Annual working days

= 110,500 / 250
 = 442 wheels / day
PRODUCTION
 The company wants to find out the what is their run time, and their
total annual cost!


 We start by finding the Optimum Production Quantity,

◦

Qo =

2 DS p
 H ( p−u )


 We find out by substituting the values that the Economic

Production Quantity, Qº = 10,912 tires



I max = Qo p * p − u
Now, Maximum Inventory, ( )
 Imax = 1,265.79 ~ 1,266 tires
PRODUCTION
 Calculating,
 Total Cost = Carrying Cost + Set up Cost

( )H +( )S


I max



= 2
D
Q0
 = Dhs. 10,127


 Cycle Time = 25 days

 Run Time = 22 days
Purchasing – Cycle Frame
 The supplier provides a quantity discount

Quantity Price (Dhs)

0 – 499 400

500 – 1999 350

2000 – 2999 300



3000 – 4999 270


5000 or more 250
 The other constraints are :
 Ordering Cost = Dhs. 750
 Carrying Cost = Dhs. 15 / cycle frame/ year
And the Demand is the same as the demand of the total number of

cycles. Therefore, Demand = 50,000 cycle frames.

 Lead Time = 10 days
Purchasing – Cycle Frame
 Optimal Order Quantity, Quantity Price (Dhs)
 EOQ = 2 DS
H 0 – 499 400

500 – 1999 350

= 2*50 , 000*750
15
2000 – 2999 300
 3000 – 4999 270

 = 2,236 5000 or more 250

 Now, This Quantity falls in the range 2000-2999, therefore a price,

 P = Dhs. 300 per cycle frame. Therefore,


TC2236 = Q
H + QD S + PD = Dhs. 15,033,541



2


Q is t aken as 2236 P is Dhs 300

Purchasing – Cycle Frame
 As we see from the discount table, there are lower Quantity Price (Dhs)
cost ranges that exist. Therefore we need to
consider the Total cost if 3000 and 5000 frames 0 – 499 400
500 – 1999 350
are purchased accordingly.
2000 – 2999 300

3000 – 4999 270
 Like we calculated TC2236 in the previous slide, we 5000 or more 250
can calculate the TC3000 and TC5000 which is
summarized in the table below:

Quantity Total Cost - Dhs

2236 @ Dhs.300/frame 15,033,541

3000 @ Dhs.270/frame 13,535,000

5000 @ Dhs 250/frame 12,545,000 It is evident t hat 5000 cycle fram es

per order yields t he lowest t ot al cost .
Therefore,
Overall Opt im al Order Quant it y =
5000 cycle fram es
Purchasing – Cycle Frame
 Now calculating the Re-Order Point,
 ROP = Daily Demand * Lead Time

Given as 10 days
 50,000 fram es per year / 250 w orking days

 = 200 * 10 = 2000 cycle frames



 That is, When the inventory level falls below 2000 cycle frames, it has
to be reorder, so that the production doesn’t not stop because of
stock-out.
Summarizing – Inventory
Using t he dat a below, t he com pany can set up t heir invent ories
effect ively based on t he param et er values.
PRODUCTION – Cycle Tires
Quantity to be produced in each run 10,912 tires
Maximum Inventory 1266 tires
Total Cost Dhs. 10,127.23
Cycle Time 24.68 ~ 25 days
Run Time 21.82 ~ 22 days

PURCHASE - Cycle Frames

Economic Order Quantity 2,236 frames
Optimum Order Quantity 5000 frames
Price / frame Dhs. 250
Re-Order Point 2000 frames
No of times to order in a year 10 times
Total Cost Dhs. 12,545,000