Inventory

Problem &
Vendor Selection
Problem

AQUINO | CATALBAS | GARCIA | SAN DIEGO

 INVENTORY PROBLEM

SITUATION
A manager receives a forecast next year. Demand is projected
to be 600 units for the first half of the year and 900 units for the
second half. The monthly holding cost is $2 per unit and it costs as
estimate of $55 to process an order.
 GIVEN

1st Half 2nd Half

(Jan – June) (July – December)
Demand 600 900
Carrying Cost $2/unit/month $2/unit/month
Ordering Cost $55 $55
 QUESTIONS

A) Assuming that monthly demand will be level during each of the

six-month periods covered by the forecast (e.g 100 per month for
each of the six months)

Determine an order size that will minimize the sum of ordering

and carrying costs that can be used for each of the six month
periods.
SOLUTION
2(55)(600/6)
!"#$ =
1st Half 2
(Jan – June)
Demand 600
74.16
Carrying Cost $2/unit/month !"#$ =
units/order
Ordering Cost $55

To meet the demand of

Using the 600 units, order 74.16 units
Formula: 8.09 times
SOLUTION 2(55)(900/6)
!"#$ =
2
2nd Half
(July - December)
Demand 900 !"#$ = 90.83
Carrying Cost $2/unit/month units/order
Ordering Cost $55

To meet the demand of

Using the 900 units, order 90.83 units
Formula: 9.9 times
QUESTION

B) Why is it important to be able to assume that demand will be

level during each six-month period?

To gauge the correct number of units to order per

period, considering the costs that will be incurred and the
demand of the market.
QUESTION

C) If the vendor is willing to offer the manager a discount of $10

per order for ordering in multiples of 50 units (e.g., 50, 100, 150),
would you advise the manager to take advantage of the offer in
either period? If so, what order size would you recommend?
Without Discount
Order Cost = $ 55

1st Half 2nd Half

(Jan – June) (July – December)
Q opt 74 90
OC + CC 100 74 150 90
55 74 + 2 2 55 90 + 2 2

74.16 + 74.16 90.83 + 90.83

Total Cost per month $ 148.32 $ 181.66
Without Discount
Order Cost = $ 45
Without Discount = $ 148.32
V.S.
With Discount = $ 140.00
1st Half
Q CO CC Total
45*(D/Q) 2*Q/2 CO+CC
50 90.00 50.00 140.00
100 45.00 100.00 145.00 The manager should
150 30.00 150.00 180.00 take advantage of the
offer and order 50 units
on the first half of the
year
With Discount
Order Cost = $ 45 Without Discount = $ 181.66
V.S.
With Discount = $ 167.50

2nd Half
Q CO CC Total
45*(D/Q) 2*Q/2 CO+CC
50 135.00 50.00 185.00
100 67.50 100.00 167.50 The manager should take
150 45.00 150.00 195.00 advantage of the offer and
order 100 units on the
second half of the year
 RECOMMENDATION
We recommend that the company order in multiples of 150 units for the first
half and second half of the year since the total cost is cheaper compared to the
other 2 alternative order size.

Period Multiples of Total Demand Total Cost

First Half 150 600 330 per 150 units
Second Half 150 900 420 per 150 units
 VENDOR SELECTION PROBLEM

SITUATION
The owner of a diner has summarized the price lists from four
potential vendors who want to supply her with cooking oil. Monthly
usage is 300 liters, ordering cost is P10 per order, and the monthly
carrying cost is 2% of the purchase price.

Which vendor should she use, and what order quantity is best if she
wants to minimize total monthly costs?
GIVEN
SOLUTION

VENDOR W
Quantity Price PC Number of Total OC CC Q/2 Total CC Total Cost
($) ($) Orders per ($) ($) ($) ($)
Month
99 25 7,500.00 3.0303 40.00 0.50 49.5 24.75 7,564.75
300 24 7,200.00 1.0000 10.00 0.48 150 72.00 7,282.00
 SOLUTION
VENDOR X
Quantity Price PC Number of Total OC CC Q/2 Total CC Total Cost
($) ($) Orders per ($) ($) ($) ($)
Month
79 25 7,500.00 3.7975 40.00 0.50 39.5 19.75 7,559.75
139 24 7,200.00 2.1583 30.00 0.48 69.5 33.36 7,263.36

299 23 6,900.00 1.0033 20.00 0.46 149.5 68.77 6,988.77

300 22 6,600.00 1.0000 10.00 0.44 150 66.00 6,676.00

 SOLUTION
VENDOR Y
Quantity Price PC Number of Total OC CC Q/2 Total CC Total Cost
($) ($) Orders per ($) ($) ($) ($)
Month
25 27 8,100.00 12.0000 120.00 0.54 12.5 6.75 8,226.75
89 25 7,500.00 3.3708 40.00 0.50 44.5 22.25 7,562.25

199 24 7,200.00 1.5075 20.00 0.48 99.5 47.76 7,267.76

300 23 6,900.00 1.0000 10.00 0.46 150 69.00 6,979.00
 SOLUTION
VENDOR Z
Quantity Price PC Number of Total OC CC Q/2 Total CC Total Cost
($) ($) Orders per ($) ($) ($) ($)
Month
59 26 7,800.00 5.0847 60.00 0.52 29.5 15.34 7,875.34
139 25 7,500.00 2.1583 30.00 0.50 69.5 34.75 7,564.75

249 24 7,200.00 1.2048 20.00 0.48 124.5 59.76 7,279.76

300 23 6,900.00 1.0000 10.00 0.46 150 69.00 6,979.00
 RECOMENDATION

VENDOR X
Quantity Price PC Number of Total OC CC Q/2 Total CC Total Cost
($) ($) Orders per ($) ($) ($) ($)
Month

300 22 6,600.00 1.0000 10.00 0.44 150 66.00 6,676.00

The owner of the diner must choose Vendor X and order in quantities of 300.