Question

How would you handle inventory management for engine blocks using the(R,S) policy, considering an ordering cost of $400, an inventory review cost of $100 per order, and an inventory holding cost of $24 per unit?

Answer 1

The (R,S) policy is an inventory management strategy that involves setting a reorder point (R) and reorder quantity (S) to maintain desired stock levels. The reorder point is determined by considering the lead time and average demand, while the reorder quantity is calculated using the economic order quantity (EOQ) formula. Historical data or sales forecasts can help determine the annual demand for engine blocks.

Step-by-step explanation:

The (R,S) policy is a popular inventory management strategy used to determine when and how much inventory should be ordered to maintain a desired level of stock. In this case, for engine blocks, the (R,S) policy would involve setting a reorder point (R) and a reorder quantity (S). The reorder point represents the inventory level at which a new order is triggered, while the reorder quantity is the amount of inventory to be ordered when the reorder point is reached.

To calculate the reorder point, you need to consider the lead time (time it takes for the order to be processed and delivered) and the average demand during that lead time. For example, if the average daily demand for engine blocks is 10 units and the lead time is 5 days, the reorder point would be 10 units/day * 5 days = 50 units.

The reorder quantity (S) is determined by considering the economic order quantity (EOQ) formula, which takes into account the ordering cost, inventory holding cost, and the demand rate. The EOQ formula is:

S = sqrt((2 * C * D) / H)

Where:
- S is the reorder quantity
- C is the ordering cost per order ($400 in this case)
- D is the annual demand for engine blocks (can be derived from historical data)
- H is the inventory holding cost per unit per year ($24 in this case)

Substituting the values from the given information:
S = sqrt((2 * 400 * D) / 24)

It is important to note that you'll need the annual demand for engine blocks to calculate the reorder quantity. If this information is not provided, it would be helpful to gather historical data or estimate the demand based on sales forecasts or market analysis.