Small Tutorial (WG)
Exercise 4
1. Consider an IKEA manufacturer deciding on the size of its replenishment order
from one of Europe’s leading wholesaler for wood-based goods, the JAF Group.
What costs should be taken into account when making this decision?
Holding costs, material costs, and ordering costs.
2. Discuss how various costs for the IKEA manufacturer in Question 1 change as it
decreases the lot size ordered from the JAF Group.
Holding costs go down, since the cycle inventory decreases when the lot size decreases.
Material costs are only relevant when looking at different suppliers for the same product.
The ordering costs stay the same, since these are measured per order. However, if lot size
decreases, there will probably be ordered more often. Thus, resulting in an increase in the
annual ordering costs.
3. As demand from the IKEA manufacturer in Question 1 grows, how would you
expect the cycle inventory measured in days of inventory to change? Explain.
If demand grows, and the lot size stays the same, the cycle inventory measured in days will
decrease, since the increased demand will cause the inventory to run out quicker than before.
The cycle inventory measured in units, will not change, since the lot size does not change.
4.
D = 20.000 per month 240.000 per year S = 400 independent of quantity h = 0.2
All-Unit
Interval Price per unit
0 – 19.999 1 dollar
20.000 – 40.000 0.98 dollar
40.000+ 0.96 dollar
Q0 = 30983.87 So Q* = 0
Q1 = 31298.43 So Q* = 31.298.43
Q2 = 31622.78 So Q* = 40.000
TC0 = 0
TC1 = 241334.49
TC2 = 236640
So optimal lot size is Q*=40.000 with a price per unit of 0.96 dollar, and an annual cost of
236.640 dollar.
Cycle inventory is then 20.000 units.
For a price of 0.96 dollar, a lot size of 31622.78 and therefore a cycle inventory of 15811.39,
is optimal. So the cycle inventory is 26.5% lower then.
Exercise 4
1. Consider an IKEA manufacturer deciding on the size of its replenishment order
from one of Europe’s leading wholesaler for wood-based goods, the JAF Group.
What costs should be taken into account when making this decision?
Holding costs, material costs, and ordering costs.
2. Discuss how various costs for the IKEA manufacturer in Question 1 change as it
decreases the lot size ordered from the JAF Group.
Holding costs go down, since the cycle inventory decreases when the lot size decreases.
Material costs are only relevant when looking at different suppliers for the same product.
The ordering costs stay the same, since these are measured per order. However, if lot size
decreases, there will probably be ordered more often. Thus, resulting in an increase in the
annual ordering costs.
3. As demand from the IKEA manufacturer in Question 1 grows, how would you
expect the cycle inventory measured in days of inventory to change? Explain.
If demand grows, and the lot size stays the same, the cycle inventory measured in days will
decrease, since the increased demand will cause the inventory to run out quicker than before.
The cycle inventory measured in units, will not change, since the lot size does not change.
4.
D = 20.000 per month 240.000 per year S = 400 independent of quantity h = 0.2
All-Unit
Interval Price per unit
0 – 19.999 1 dollar
20.000 – 40.000 0.98 dollar
40.000+ 0.96 dollar
Q0 = 30983.87 So Q* = 0
Q1 = 31298.43 So Q* = 31.298.43
Q2 = 31622.78 So Q* = 40.000
TC0 = 0
TC1 = 241334.49
TC2 = 236640
So optimal lot size is Q*=40.000 with a price per unit of 0.96 dollar, and an annual cost of
236.640 dollar.
Cycle inventory is then 20.000 units.
For a price of 0.96 dollar, a lot size of 31622.78 and therefore a cycle inventory of 15811.39,
is optimal. So the cycle inventory is 26.5% lower then.
