Transportation / Optimizing Inventory

Optimizing Inventory / Transportation

Optimizing Inventory/Transportation

Danny Wilco

Re: Quarterly Ordering Decisions

Problem Situation

Optimal order-quantity technique is one of the sophisticated inventory management systems that our organization can employ to manage our inventories. The traditional inventory management technique we are using is making our company to incur additional costs of operation. The annual inventory holding costs is 4% thereby increasing our costs operation, and reducing our profitability. In the course of this problem, we are required to implement the optimal order-quantity technique to assist our company to lower the costs of managing our inventory thereby increasing our profitability.

Assumptions

Our pricing estimate is based on the markup factor of 140% or 1.4.

There is an estimation of 4% of the annual inventory holding costs.

The quarterly sales forecast of the Kegs of the Imported Beer line is estimated based on the inflation of 100% for the last quarter, which forms the basis of the next four quarters.

Moreover, we expect a seasonal cost reduction for the next three quarters.

The ending inventory is 175 for our total number of our imported beer and our capacity for the Kegs is approximately 190 for Imported Beers.

Solution for Order Quantities

We use the costs and forecast demand in the Appendix 1 to estimate the total sales forecast. The data in the Table 1 reveals our sales forecast for each of the four quarters of our imported Beer line for our kegs. However, the inflation for the last quarter is 100% and the inventory constraint is the quarterly holding cost, which is approximately 4% annually. As being revealed in the Table 1, there is an increase in sales within the next four quarters, and we arrive at the sales forecast for each product by multiplying the price per unit with forecast demand.

Table 1

Forecast Demand

Next 4 Quarters

Product Code

1

2

3

4

Total Annual Demand

$1,468.60

$1,762.32

$1,835.75

$1,909.18

$1,460.34

$1,541.47

$1,655.05

$1,752.41

$1,481.55

$1,568.70

$1,568.70

$1,481.55

$1,056.13

$1,280.16

$1,440.18

$1,440.18

$1,454.22

$1,473.11

$1,510.88

$1,510.88

$2,384.34

$2,157.26

$2,270.80

$2,384.34

$829.92

$968.24

$1,037.40

$1,037.40

$1,606.22

$1,752.24

$1,825.25

$1,825.25

$2,234.96

$2,234.96

$2,234.96

$2,406.88

$1,101.10

$1,321.32

$1,541.54

$1,761.76

Total

$15,078.38

$16,061.78

$16,923.51

$17,513.83

$65,577.50

The table 2 reveals the costs per unit. We calculate the cost per unit based on the inflation rate of each quarter, and we arrive at the costs per unit by multiplying the product unit with the inflation rate of each quarter.

Table 2

Forecast Cost Per Unit

Actual Last Qtr

Next 4 Quarters

Product Code

Cost

1

2

3

4

$10.49

$10.70

$10.91

$10.18

$10.70

$11.59

$11.82

$12.05

$11.24

$11.82

$12.45

$12.70

$12.95

$12.08

$12.70

$11.43

$11.66

$11.89

$11.09

$11.66

$13.49

$13.76

$14.03

$13.09

$13.76

$16.22

$16.54

$16.87

$15.73

$16.54

$9.88

$10.08

$10.28

$9.58

$10.08

$10.43

$10.64

$10.85

$10.12

$10.64

$12.28

$12.53

$12.77

$11.91

$12.53

$15.73

$16.04

$16.36

$15.26

$16.04

Inflation

97%

The Table 3 reveals that the overall product costs for the next four quarter. The paper arrives at the product costs by multiplying the costs per unit with the forecast demand. To arrive at the overall accurate costs, we estimate the costs based on the inflation rate of each quarter. The total annual costs are $47,395.73. We also estimate the total annual holding inventory cost of 4%, which is approximately $1,895.83. Thus, the total product costs plus the annual holding inventory costs is $49,291.56.

Table 3

Forecast Costs

Next 4 Quarters

Product Code

1

2

3

4

Total

$1,069.98

$1,309.15

$1,271.91

$1,390.97

$1,063.96

$1,145.09

$1,146.71

$1,276.75

$1,079.42

$1,165.32

$1,086.89

$1,079.42

$769.47

$950.98

$997.84

$1,049.27

$1,059.50

$1,094.31

$1,046.82

$1,100.78

$1,737.16

$1,602.54

$1,573.34

$1,737.16

$604.66

$719.26

$718.77

$755.82

$1,170.25

$1,301.66

$1,264.64

$1,329.83

$1,628.33

$1,660.26

$1,548.51

$1,753.58

$802.23

$981.55

$1,068.07

$1,283.57

Total

$10,984.95

$11,930.12

$11,723.50

$12,757.16

$47,395.73

Annual Inventory Holding Costs (4%)

$1,895.83

Total Annual Costs

$49,291.56

The Table 4 reveals the forecast profits for the each quarter. We arrive at the profits for each quarter by deducting the total costs from the total sales of each product. We arrive at the total annual profits of $16,285.94 by deducting the total annual costs from the total annual forecast demand.

Table 4

Forecast Profits

Next 4 Quarters

Product Code

1

2

3

4

$398.62

$453.17

$563.84

$518.21

$396.38

$396.38

$508.34

$475.65

$402.14

$403.38

$481.82

$402.14

$286.66

$329.18

$442.34

$390.91

$394.72

$378.80

$464.06

$410.10

$647.18

$554.72

$697.46

$647.18

$225.26

$248.98

$318.63

$281.58

$435.97

$450.58

$560.61

$495.43

$606.63

$574.70

$686.45

$653.30

$298.87

$339.77

$473.47

$478.19

Total

$4,092.43

$4,129.66

$5,197.01

$4,752.67

Total Annual Demand - Total Annual Cost

Total Annual Profits

$65,577.50 - $49,291.56

$16,285.94

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