Logistics Lab1
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WEEK 1 LAB
Logistics
Professor: Ronita Brooks
January 8, 2012
Question 1: Using the EOQ methods outlined in chapter 9, how many kegs of nails should Low order at one time?
The EOQ formula is:
EOQ = √ 2 (annual use in units) (cost of placing an order) /
annual carrying cost per item per year
= √ 2 (2000) (60) / 2
= √ 120,000
= 345 kegs per order
Note the 2 in the denominator. That is because, on average, the rented warehouse space is only half full, which, makes the average warehousing cost per keg be $2.
Question 2: Assume all conditions in question 1 hold, except that Lows supplier now offers a quantity discount in the form of absorbing all or part of Lows order processing costs. For orders of 750 or more kegs of nails, the supplier will absorb all the order processing costs; for orders between 249 and 749 kegs, the supplier will absorb half. What is Lows new EOQ? (It might be useful to lay out all costs in tabular form for this and later questions.)
Orders/year
Order size
Processing costs ($)
Warehousing costs ($)
Sum of processing and warehousing costs ($)
2,000
2,000
2,000
1,000
1,000
1,000
The new EOQ, based on the above information, is 250 kegs.
Question 3: Temporarily, ignore your work on question 2. Assume that Lows warehouse offers to rent Low space on the basis of the average number of kegs Low will have in stock, rather than on the maximum number of kegs Low would need room for whenever a new shipment arrived. The storage cost per keg remains the same. Does this change the answer to Question 1? If so, what is the new answer?
The relevant table is as follows:
Orders/year
Order size
Processing costs ($)
Warehousing costs ($)
Sum of processing and warehousing costs ($)
2,000
1,000
1,060
1,000
The new EOQ, based on the above information, is 500.
Question 4: Take into account the answer to question 1 and the suppliers new policy outlined in question 2 and the warehouses new policy in question 3. Then determine Lows new EOQ.
The relevant table is as follows:
Orders/year
Order size
Processing costs ($)
Warehousing costs ($)
Sum of processing and warehousing costs ($)
2,000
1,000
1,000
1,000