Question

You are responsible for managing the diaper inventory at an Amazon warehouse. Demand for diaper boxes from this warehouse is predictable and is about 10,000 boxes per month. The fixed cost of placing a diaper box order from a supplier is $400 per order (mostly due to fixed transportation costs). Furthermore, you estimate that the holding cost of a box of diapers is about $0.5 per month. The wholesale cost of each box of diapers from the supplier is $15 per box.

1. What is the cost-minimizing number of boxes that you should order from your supplier? How often should you place this order?
2. Due to the consolidation of replenishment orders of different products, your manager informs you that you are constrained to re-ordering diaper boxes only once a month (i.e., you must place a replenishment order once every month). What should be your ordering quantity in this case? By how much does your average monthly costs increase compared to the ordering quantity in Question 1?

Answer 1

1. EOQ = 4,000 units per order.

place an order every 12 days.

2. If you can only make one purchase per month, the purchase order should be for 10,000 units.

Total inventory costs would increase by $10,800

Step-by-step explanation:

annual demand = 10,000 x 12 = 120,000

annual holding cost per unit = $0.50 x 12 = $6

order cost = $400

EOQ = √[(2 x 120,000 x $400) / $6] = √16,000,000 = 4,000

total number of orders per year = 120,000 / 4,000 = 30

each order will be placed after 365 / 30 = 12.17 days

total inventory costs = (30 x $400) + (2,000 x $6) = $24,000

new inventory costs = (12 x $400) + (5,000 x $6) = $34,800