Question: 1 Marks: 05
A company has to supply 1000 items per month at uniform rate and each time a
production run is started it costs Rs.200. Cost of storing is Rs.20 per item per month. The
number of items to be produced per run must be ascertained. Determine the total set-up
cost and the average inventory cost if the run size is 500,600,700,800. Find the optimal
production run size.
Given Data:
Demand: 1000 items per month
Setup Cost per Run: Rs. 200
Storage Cost per Item per Month: Rs. 20
Possible Production Run Sizes: 500, 600, 700, and 800
Calculation for Run Size = 500:
Total Setup Cost:
Total Setup Cost = (1000 / 500) × 200 = 2 × 200 = Rs. 400
Average Inventory Cost:
Average Inventory Cost = (500 / 2) × 20 = 250 × 20 = Rs. 5000
Total Cost:
Total Cost = 400 + 5000 = Rs. 5400
Calculation for Run Size = 600:
Total Setup Cost:
Total Setup Cost = (1000 / 600) × 200 = 1.67 × 200 = Rs. 333.33
Average Inventory Cost:
Average Inventory Cost = (600 / 2) × 20 = 300 × 20 = Rs. 6000
Total Cost:
Total Cost = 333.33 + 6000 = Rs. 6333.33
Calculation for Run Size = 700:
Total Setup Cost:
Total Setup Cost = (1000 / 700) × 200 = 1.43 × 200 = Rs. 285.71
Average Inventory Cost:
Average Inventory Cost = (700 / 2) × 20 = 350 × 20 = Rs. 7000
Total Cost:
Total Cost = 285.71 + 7000 = Rs. 7285.71
Calculation for Run Size = 800:
Total Setup Cost:
Total Setup Cost = (1000 / 800) × 200 = 1.25 × 200 = Rs. 250
Average Inventory Cost:
Average Inventory Cost = (800 / 2) × 20 = 400 × 20 = Rs. 8000
Total Cost:
Total Cost = 250 + 8000 = Rs. 8250
Summary of Results:
Total Setup Cost Average Inventory Cost
Run Size (Units) Total Cost (Rs.)
(Rs.) (Rs.)
500 400 5000 5400
600 333.33 6000 6333.33
700 285.71 7000 7285.71
800 250 8000 8250
Optimal Production Run Size:
The optimal production run size is the one that minimizes the Total Cost. From the
table, we see that the minimum total cost occurs when the run size is 500, with a total
cost of Rs. 5400.
Thus, the optimal production run size is 500 units.
Question: 2 Marks: 05
In a central grain store, it takes about 15 days to get the stock after placing the order and
daily 500 tons are dispatched to neighboring markets. On an ad-hoc basis safety stock is
assumed to be 10 days stock. Calculate the recorder point.
Given Data:
Lead Time (in days): 15 days
Dispatch Rate (per day): 500 tons/day
Safety Stock (in days): 10 days
Reorder Point Formula:
The reorder point (ROP) is the inventory level at which a new order should be placed to
replenish stock before it runs out. It is calculated using the formula:
Reorder Point (ROP)=(Lead Time in days×Dispatch Rate per day)+Safety Stock\
text{Reorder Point (ROP)} = (\text{Lead Time in days} \times \text{Dispatch Rate per
day}) + \text{Safety
Stock}Reorder Point (ROP)=(Lead Time in days×Dispatch Rate per day)+Safety Stock
Where:
Lead Time in days is the time it takes to receive a new stock order (15 days).
Dispatch Rate per day is the amount of stock dispatched daily (500 tons/day).
Safety Stock is the inventory buffer to prevent stockouts (10 days' worth of
dispatch).
Calculation:
1. Lead Time Demand: The demand during the lead time is calculated as:
Lead Time Demand=Lead Time in days×Dispatch Rate per day=15×500=7500 to
ns\text{Lead Time Demand} = \text{Lead Time in days} \times \text{Dispatch
Rate per day} = 15 \times 500 = 7500 \
text{ tons}Lead Time Demand=Lead Time in days×Dispatch Rate per day=15×50
0=7500 tons
2. Safety Stock: The safety stock for 10 days' worth of inventory is calculated as:
Safety Stock=Safety Stock in days×Dispatch Rate per day=10×500=5000 tons\
text{Safety Stock} = \text{Safety Stock in days} \times \text{Dispatch Rate per
day} = 10 \times 500 = 5000 \
text{ tons}Safety Stock=Safety Stock in days×Dispatch Rate per day=10×500=50
00 tons
3. Reorder Point (ROP): Finally, the reorder point is:
ROP=Lead Time Demand+Safety Stock=7500+5000=12,500 tons\text{ROP} = \
text{Lead Time Demand} + \text{Safety Stock} = 7500 + 5000 = 12,500 \
text{ tons}ROP=Lead Time Demand+Safety Stock=7500+5000=12,500 tons
Conclusion:
The reorder point for the grain store is 12,500 tons. This means that when the inventory
level reaches 12,500 tons, a new order should be placed to replenish the stock before it
runs out.