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 50 bearings be shipped to it each business day.
Based on the information provided, we can calculate the economic order quantity (EOQ) for ABC Enterprise to determine the optimal order quantity that minimizes the total cost of production and inventory.
To calculate the EOQ, we need to consider the annual demand, setup cost, and holding cost.
1. Annual Demand (D): The annual demand for wheel bearings that XYZ Sdn Bhd requires is given as 10,000 units.
2. Setup Cost (S): The setup cost for ABC Enterprise is $40 per order.
3. Holding Cost (H): The holding cost for ABC Enterprise is $60 per wheel bearing per year.
Using the formula for EOQ:
EOQ = √[(2DS)/H]
Let's plug in the values:
D = 10,000 (annual demand)
S = $40 (setup cost per order)
H = $60 (holding cost per wheel bearing per year)
EOQ = √[(2 * 10,000 * 40) / 60]
Now, let's calculate:
EOQ = √[800,000 / 60]
EOQ = √13,333.33
EOQ ≈ 115.47
Therefore, the economic order quantity for ABC Enterprise is approximately 115.47 wheel bearings. This means that ABC Enterprise should produce and deliver around 115 wheel bearings to XYZ Sdn Bhd whenever inventory reaches a level of 50 wheel bearings.
Please note that the EOQ calculation assumes constant demand, negligible lead time, and no stock-outs.