Adam Ziqry is the production manager of ABC Enterprise, a small producer of metal parts. ABC Enterprise supplies XYZ Sdn Bhd, a larger assembly Company, with 10,000 wheel bearings each year. This order has been stable for some time. Set up cost for ABC Enterprise is $40, and holding cost is $60 per wheel bearing per year. ABC Enterprise can produce 500 wheel bearing per day. XYZ Sdn Bhd is a just-in-time manufacturer and requires that bearings be shipped to it each business day.
Adam Ziqry needs to determine the optimal order quantity for the wheel bearings to minimize the total cost of production and inventory for ABC Enterprise.
To calculate the optimal order quantity, Adam can use the Economic Order Quantity (EOQ) formula. The EOQ formula considers the setup cost, holding cost, and production capacity to determine the quantity of bearings that should be ordered at a time.
The formula for Economic Order Quantity (EOQ) is as follows:
EOQ = √(2DS / H)
Where:
D = Annual demand (10,000 wheel bearings)
S = Setup cost per order ($40)
H = Holding cost per unit per year ($60)
Now, let's calculate the EOQ for ABC Enterprise:
EOQ = √(2 * 10,000 * 40 / 60)
EOQ = √(2 * 666.67)
EOQ ≈ √(1333.33)
EOQ ≈ 36.5
Round it to a whole number, so the optimal order quantity is approximately 37 wheel bearings per order.
Since ABC Enterprise produces 500 wheel bearings per day, they can complete an order of 37 wheel bearings within one day.
Therefore, Adam Ziqry should set the order quantity to 37 wheel bearings to minimize production and inventory costs for ABC Enterprise.