Cost Control

Mike was enrolled in the full-time MBA program but dropped out to open a bait shop catering to local fisher people. One of Mike's best sellers is U-Stink-Um bait which is sold in tubs for $10 apiece. Randy pays $5 for each tub and can place orders for additional tubs in any amount whenever he likes. He has estimated his annual carrying costs to be 20% of the wholesale price, and his costs of placing an order are approximately $25 for each order. Suppose average weekly demand is roughly 250 tubs of bait and that demand is relatively uniform throughout the year. How many tubs of bait should Randy order each time he places an order?

The quantity that minimizes the sum of inventory cost and fixed ordering cost is:

Where:

K = Set up Cost = $25 per order

R = Flow Rate = 250 units/week x 52 weeks = 13,000 units

h = Holding Cost = 0.2 x $5 = $1

So:

units

Mike should order 806 units each time

How frequently (approximately) will he place an order?

The order cycle is = weeks

Assuming that demand is uniform and constant at 250 units per week and also that there is not lead time; he should place the order every three weeks approximately (3.22 weeks). If there is a lead time in receiving this order, he would have to place the order early)

This is an example about how the cost can be reduced by controlling the stock and the materials flow of the company. Many opportunities underly in the daily activity of having better control and consecuently saving efects in the results of the company.

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