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Economic Order Model – Three Jays Corporation Case Study

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Question:

Describe about the Economic Order Model for Three Jays Corporation Case Study.

 

Answer:

1: The Economic Order Quantity (EOQ) and Reorder Point Quantity are arrived at by using the following formulas.

Whereby;

EOQ represent the annual Demand of the inventory by an entity

S represents the setup costs incurred in bringing the inventory into saleable condition.

D is Demand for the year

C represents unit cos

i stands for Carrying cost percentage.

On the other side, ROP is obtained by using the formula illustrated below:

ROP =    3 x D

52

Using the five SKUS 2012 annual demand data the Company EOQ and ROP will be as follows..

 

Total set up cost (S)

Weekly Demand (D)

Carrying cost (i)

Unit Cost (C)

EOQ (case)

ROP

(case)

Strawberry Jam

63.70

74

9%

 28.34

61

4

Raspberry Jelly

63.70

63.75

9%

 30.52

54

4

Peach Jam

63.70

44.5

9%

 26.86

48

3

Blueberry Jam

63.70

27.75

9%

 29.01

37

2

Apple/Mint Jelly

63.70

16.5

9%

 26.32

30

1

NOTE:

The following figures in the EOQ and ROP column have been arrived at by using the above two formulas

The weekly demand is arrived at by dividing the monthly demand by 4 to obtain the weekly demand in the last week of June 2012.

When the data obtained from this calculation is compared with the one of 2011, it comes out clearly that the annual demand has been increasing. This because of the demand for the product in the market is increasing, and also the company is avoiding to create the shortage of its products in the market (Sukhia, Khan, & Bano, 2014).

2: The costs associated with EOQ are based both on the variable costs and the fixed costs (Sulak, Ero?lu, Bayhan, & Avci, 2015). Variable costs differ with the level of production, and thus the value of EOQ should be obtained by putting into consideration all the inputs which actively participated in the production. Therefore, in this case, the costs attributable to the three works should not be included in total costs. This leads to a reduction of the total costs incurred by the three workers from the total cost as follows.

63.70 – (1.29 x 3)

= 59.80.

Using this new cost the EOQ and ROP of the year 2012 will be recalculated as;

 

 

Total set up cost (S)

Weekly Demand (D)

Carrying cost (i)

Unit Cost (C)

EOQ (case)

ROP

(case)

Strawberry Jam

59.80

74

9%

 28.34

58

4

Raspberry Jelly

59.80

63.75

9%

 30.52

53

4

Peach Jam

59.80

44.5

9%

 26.86

47

3

Blueberry Jam

59.80

27.75

9%

 29.01

36

2

Apple/Mint Jelly

59.80

16.5

9%

 26.32

29

1

From the comparison of the two calculations, the cost of the two laid-off workers should not be included in the calculation. This is because their costs rise the quantity demanded. This is quite evident when the QOE figures are compared in the two table. Therefore, excluding their costs, it will lead to reducing the quantity ordered by the company.

3: When the two results are compared it clearly reflects that data obtained when including the costs of the idle workers leads to the increase of the quantity demanded production. For instance, for Strawberry Jam the quantity demanded using the data of exhibit 2 is 61. However, when the cost of the idle workers is excluded the quantity demanded the production of the same product will be 58. Upon evaluating the scheduling method suggested by Jake and Josh. This paper finds that this is not the right schedule to use for determining the annual demand for the quantity needed for the production. This because some of the components used in ascertaining the quantity demanded are appropriate for the purchase of inventory but not for the raw materials needed for production. Jake and Josh are not following the established system either because they are not aware of the fundamental aspects which should or that should not be included in the calculation of the EOQ.

4: When the Jake and Josh procedures are compared with that of exhibit 2, the Jake and Josh schedule seems to vary from the exhibit 2.  The exhibit two procedure accommodates each critical aspect of the EOQ model in the calculation of both EOQ and ROP. Additionally, it focuses on scrutinizing each concept of the EOQ before combining them to obtain the EOQ or ROP. According to Kumar (2016), the EOQ model should aim at helping the company to obtain the required annual demand at the lowest cost possible. However, for exhibit procedure to be effective, it should only consider costs associated with the setup costs, unit cost and carrying costs. Milad, Farid, & Mohammad (2014) noted that costs should be directly linked to the EOQ or ROP.

5: After checking out the Jake and Josh procedure as well as coming up with his schedule, Brodie stands a higher chance of having various recommendations to present to Jana Fremont. First, all the costs should be analyzed and evaluated to determine their inclusion in the calculation of either EOQ or ROP. This is because it may result in unrealistic annual demand. Again, the unit costs should be based on both the variable and fixed costs directly attributable to the production. Alternatively, both set ups costs and carrying costs should be limited to only components related to EOQ directly. Third, the company should adjust the weekly reorder point in order to reduce the costs of placing orders frequently. The less the frequencies of the reorder point the lower the costs the company will incur. Fourth, the EOQ demanded by the company should not be based on the previous month demand plus the safety stock but according to the market analysis and demand of each product in the market. Therefore, the company should carry out market analysis to determine which months the sales are high and the ones the sales will be low.

 

References

Kumar, R. (2016). Economic Order Quantity (EOQ) Model. Global Journal of Finance and Economic Management, 5(1), 1-5.

Milad, E., Farid, K., & Mohammad, K. (2014). Economic Order Quantity Model. International Journal of Industrial Engineering Computations, 5(2), 211-222.

Sukhia, K. N., Khan, A. A., & Bano, M. (2014). Introducing Economic Order Quantity Model for Inventory Control in Web-based Point of Sale Applications and Comparative Analysis of Techniques for Demand Forecasting in Inventory Management. International Journal of Computer Application, 107(19), 0975 – 8887.

Sulak, H., Ero?lu, A., Bayhan, M., & Avci, M. A. (2015). An Economic Order Quantity Model for Defective Items under Permissible Delay in Payments and Shortage. International Journal of Academic Research in Business and Social Sciences, 5(1), 306-316.

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