Question

General Millets company purchases various grains that it processes into ready to eat cereals. Its annual demand for wheat is 2,50,000 bushels and is uniform throughout the year. The average price of wheat is $3.0625 per bushel. Annual inventory carrying cost is 16% of the inventory value. The costs of placing and receiving an order is $98. The inventory replenishment occurs in 20 days post order is placed. Determine the quantity of grains should General Mills order with the supplier each time a requisition is generated? Given its annual requirement of grains what should be the optimal ordering frequency and re-order point for General Millets company?

Answer 1

General Millets should order 31,250 bushels of wheat with an optimal ordering frequency of approximately 8 orders per year, and a reorder point of 15,625 bushels.

Step-by-step explanation:

To determine the Economic Order Quantity (EOQ), we use the EOQ formula:

`\[EOQ = \sqrt{(2DS)/(H)}\]`

Where:

- \(D\) is the annual demand (250,000 bushels)

- \(S\) is the ordering cost per order ($98)

- \(H\) is the holding cost per unit per year (16% of $3.0625)

First, calculate the holding cost per unit per year:

`\[H = 0.16 * 3.0625\]`

Then, substitute the values into the EOQ formula:

`\[EOQ = \sqrt{(2 * 250,000 * 98)/(0.16 * 3.0625)}\]`

Calculate the EOQ to find the optimal order quantity.

Next, calculate the optimal ordering frequency using the formula:

`\[ \text{Ordering frequency} = (D)/(EOQ)\]`

Substitute the values to find the optimal ordering frequency.

Finally, determine the reorder point using the formula:

`\[ \text{Reorder point} = \text{Demand per day} * \text{Lead time in days}\]`

The reorder point is the level of inventory at which a new order should be placed to avoid stockouts during the lead time. In this case, the lead time is 20 days. The demand per day is
`\( (D)/(365) \).`

By following these calculations, General Millets can optimize its ordering strategy, minimizing holding and ordering costs while ensuring a steady supply of wheat for its processing operations.