Inventory Management- Nighttingale Drugstore

Case Project #3: Inventory Management- Nightingale Drugstore

MS 5023: Decision Analysis and Production Management

Due: April 18, 2016

Joshua Stevens

Student ID: @01099386

Part (a). Inventory Policy- Basic EOQ Model

Using the data provided in the scenario including sample cost data (expenses and sale amounts), demand data, and the values of the material items, the summary of the pertinent data in the formation of our EOQ model is:

Demand/ Month= 250 toothbrushes

Demand/ Year= 250 x 12= 3000 toothbrushes/ year (assuming 360 days/ year)

D = 3000 toothbrushes/year

Wholesale price (cost to Nightingale drugstore) = $1.25/ toothbrush

        C = 1.25/toothbrush

Cost of Ordering= (20 min/ 60 min in one hour) * $18.75 hourly salary= $6.25/order

Cₒ = 6.25/order

Carrying Cost= 0.12 holding cost * 1.25 cost/unit= $0.15/toothbrush per year

Cc = 0.15/toothbrush-year

Using the information provided in the scenario related to Nightingale Drugstore, we will make the following assumptions/restrictions + decisions in the formation of our model:

1. Our inventory management system for this model will utilize a continuous (fixed- order) quantity system; order will be placed for same constant amount when the inventory decreases to a specific determined amount (the reorder point). The fixed amount is called the economic order quantity (EOQ).
2. We will be selling one product, toothbrushes.
3. The demand is known with certainty (at 3000 toothbrushes per 360-day year); this demand will continue indefinitely for the purpose of this model.  
4. The lead time (annotated as “L” below) for the receipt of orders is constant.
5. The order quantity (annotated as “Qopt” below) is the same for each order.
6. The order quantity is received instantaneously (Robert makes this decision because it only takes a couple hours for the order to arrive after the order is placed).
7. No shortages are allowed.
8. No joint orders are allowed.
9. All costs are deterministic (constant and known).

We will use the following graphs/ formulas when setting up our model:[pic 1]

Because ordering is instantaneous, the lead time, “L” is 0. This also means that the reorder point, “R” is also 0. This can be concluded because R=dL, where d= demand per time period (in years for this example) and L= 0 days OR  years.[pic 2]

L= 0 days

d= 3000 toothbrushes/ year

R= =  =  = 0 toothbrushes (irrelevant in this example)[pic 3][pic 4]

In determining optimal order quantity, “Qopt”, we use the following formula:

Qopt =  =  = 500 toothbrushes/ order[pic 5][pic 6]

The **optimal policy** is that 500 toothbrushes should be ordered when the inventory level reaches zero (since ordering is considered “instantaneous” in this example).