Unit 4 Individual Project
Operations Management Principles
MGT326-0803B-01
Michael Bailey
August 16, 2008
We will be calculating the EOQ/ELS for the raw material LRM and Finished Product CLM. We are trying to find out if the director of purchasing actions are contributing to my organization’s high COS.
We will look at the raw material LRM first. The standard order size should be calculated using the formula for EOQ, derived using basic EOQ model assumptions. This model is chosen for calculations of EOQ because the data follows all the requirements of the basic EOQ model.
Basic EOQ model assumptions are as follows:
• Demand Rate is deterministic and is constant over time.
• Instantaneous replenishment i.e. Rate of replenishment is infinite.
• Lead time and other system parameters such as costs are constant, independent of replenishment quantity and are known with certainty
• Shortages of stock are not allowed. I.e. C3 = 0.
• Acquisition cost is fixed, i.e., no quantity discounts
CALCULATIONS:
D=15000 units
Unit cost, C=$40
Holding cost rate= 0.4 of C
Holding cost, C1= 0.40*40 = $16 per unit per year.
Ordering cost, C2=$82 per order
Economic order quantity = [pic]
EOQ for LRM = [pic]= 392.11 units
EOQ for LRM = 392.11
To calculate the optimal ordering cost, we will need the number of orders per year.
The number of orders per year for EOQ = [pic] = 38.25 orders per year.
This will make the annual ordering c ...