Reference no: EM132948304

The two basic inventory decisions that managers face are how much to order or produce for additional inventory, and when to order or produce it to minimize total inventory cost, which consists of the cost of holding inventory and the cost of ordering it from the supplier.

For a manufacturing company that you are consulting for, managers are unsure about making inventory decisions associated with a key engine component. The annual demand is estimated to be 15,000 units and is assumed to be constant throughout the year. Each unit costs $80. The company's accounting department estimates that its opportunity cost for holding this item in stock for one year is 18% of the unit value. Each order placed with the supplier costs $220. The company's policy to order whenever the inventory level reaches a predetermined reorder point that provides sufficient stock to meet demand until the supplier's order can be shipped and received; and then to order twice as many units

Question

Define the data, uncontrollable inputs, model parameters, and the decision variables that influence the total inventory cost.

Develop mathematical functions that compute the annual ordering cost and annual holding cost based on average inventory held throughout the year and use them to develop a mathematical model for the total inventory cost