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Use exhibit 4 and the 2012 annual demand to find out EOQ and ROP for the 5
SKUs scheduled to be produced in the last week of June.
Three Jays Co. used one-month-old data to estimate demand for the
following month. By adding risk and safety factor and by using 2012s annual
demand, changes in EOQ and ROP are represented as follows:
This shows that the corporation needs to acquire the necessary amount of data
to forecast demand and to function at an optimal level. This will also lead to the
management of inventory in an efficient manner.
In fact, the entire scheduling was flawed. The new amounts will help the
company to operate at the optimal level while reducing overall costs.
1
Q2. What changes in cost would you recommend in Exhibit 2?
Setup cost is considered a cost that is incurred uniformly for a single batch. I
would say that the labor costs should not be a part of setup cost because the
salary was supposed to be given at regular intervals.
New setup cost = 3*12.50*1 =$ 37.50. (Since three part time workers
supported the operations and each was paid $12.50).
New carrying cost = 3% + 20 = 23%
New unit cost would be =$25.79 for Strawberry jam, $27.97 for Raspberry
jelly, $24.31 for Peach jam, $26.46 for Blueberry jam, and $23.77 for
Apple/Mint jelly.
Determining the correct costs properly will determine EOQ properly and will
help the company to perform better while allowing them to better handle their
inventory.
EOQ model was not a marvel for their operations as in EOQ, unit cost is
fixed with constant demand. Three Jays should use Periods Review Model or the
ABC Model, since their demand is not constant. PRM would include regular checks
of inventory level and forecasting is done based on this data gathered.
Therefore, it was the need of the hour that they substituted existing EOQ to a
more efficient and reliable inventory model to ensure that they operated at the
optimal level and such that the inventory was managed properly to ensure reduced
costs.
2
Q5. What recommendations should Brodie present to Jana?
The company should reevaluate their cost calculation method were not
properly constructed and had ample room for errors while estimating carrying,
setup and unit cost.
Using EOQ as inventory system is not appropriate, because their demand is
not constant and should be changed to Periodic Review Model or ABC
Model. Using this model, managers will be able to check inventory on a
regular basis.
Since the demand is not constant, the date for previous month should be used
to forecast the demand for coming month as the current system was leading to
further problems in terms of inventory management.
Scheduling is not properly developed and it is crucial to rectify for
enhancement of the efficiency of the production process.
By calculating cost properly and using data of 2012, we have following EOQ
and ROP: