Wilson Industries sources from multiple suppliers and is con

Wilson Industries sources from multiple suppliers and is considering the aggregation of inbound shipments to lower its costs. Truckload shipping costs $500 per truck along with $100 per pickup. Average annual demand from each supplier is 10,000 units. Each unit costs $50 and Wilson incurs a holding cost of 20%. • What is the optimal order frequency and order lot size if Wilson decides to aggregate 4 suppliers per truck? • What is the annual ordering and inventory carrying costs for Wilson? (you do not need to compute the material costs)

Solution

Annual demand from 4 suppliers together = D = 40,000 units

Order pickup cost = Co = Shipping cost per truck + Pickup cost = $500 + $100 = $600

Holding cost per unit per annum = Ch = 20% of $50 =$10

Optimum order size as per EOQ model

= Square root ( 2 x Co x D/Ch)

= Square root ( 2 x 600 x 40,000 /10)

= 2190.89 ( 2191 rounded to nearest whole number )

OPTIMUM ORDER LOT SIZE = 2191

Optimum order frequency

= Optimum order lot size/ Annual demand x 365 days ( in a year )

= 2191/40,000 x 365

= 19.99 days

OPTIMUM ORDER FREQUENCY WILL BE ONCE IN EVERY 19,99 DAYS

Annual ordering cost

= Co x Number of orders

= Co x Annual demand/ Optimum order quantity

= 600 x 40,000 / 2191

= $ 10953.90

Annual inventory carrying cost

= Ch x Average inventory

= Ch x Optimum order quantity / 2

= $10 x 2191/2

= $10955