1. Based on the assumption that all data collected are accurate and the methods used to collect are reliable, the EOQ calculations are correct. Given by the EOQ model, the optimal Q (quantity of an order) is set by the equation Oopt=[2(Demand Rate)(Order Setup Cost)/(Holding Cost Rate)]^(1/2). In this case, order setup cost=setup hours per order × setup cost per hour; holding cost rate= 30% × product unit cost.
2. Jamie Change only shows the optimal inventory levels for each product A-H, and the decrease in the average inventory level to Garcia, but he overlooks the consequently changes in inventory-related cost (annual ordering cost, annual holding cost, and total cost). As shown below, for product A, D, E, F, G and H, whose present order quantity is higher than EOQ optimal order quantity, the decrease in order quantity increases the ordering cost while decreases the holding cost even more, resulting a decrease in total cost. For product B, whose present order quantity is lower than EOQ optimal order quantity, the increase in order quantity increases the holding cost while decreases the ordering cost even more, resulting a decrease in total cost. For product C, whose present order quantity is similar to EOQ optimal order quantity, the holding cost, ordering cost and total cost don’t change much.
Annual ordering cost = (yearly demand)/(order quantity) × (setup hours per order) × 25 Annual holding cost = 30% × (product unit cost) × (order quantitiy/2) Annual total cost = annual ordering cost + annual holding cost
In general, the EOQ optimal order quantity will decrease the inventory-related total cost to the lowest level, which Jamie Change doesn’t explain really clearly to Garcia.
3. Generally speaking, to balance the costs with the desire to have the right products for customers, we have to take all kinds of costs into account, such as the inventory costs, rent, personnel expenses, cost of goods sold, etc. Then we try to find the right quantity to produce, price to sell, to meet the demand with the lowest cost. But here Lynn Rosen is talking more about the inventory cost. When he talks about customer-service level and inventory investment, he’s actually talking about meeting customers’ demand with optical inventory total cost. As is shown below, when he says unnecessary investment in inventories, he means the amount of cost higher than the lowest cost due to non-optimal order quantity.
To improve the customer service, the demand will definitely increase. According to Oopt=[2(Demand Rate)(Order Setup Cost)/(Holding Cost Rate)]^(1/2)，the increase in demand rate will lead to the increase in Oopt, which will also lead to more inventory cost. As is shown below.
4. From external, customers’ demand stream, especially its variation has a crucial role in determining the “right”, or optimal amount of inventory. From internal, all the holding cost and ordering cost are also keys determining the optimal amount of inventory.