Optimizing Inventory Management: How Many Cases of Widgets Should a Retailer Purchase?

Question:

How many cases of widgets should the retailer purchase at one time?

Answer:

To determine the number of cases of widgets the retailer should purchase at one time, various factors need to be considered, including the selling rate, holding cost, purchase cost, and ordering cost. In this case, the optimal order quantity of cases is calculated to be 36.76. Since fractional cases cannot be purchased, it is advisable for the retailer to purchase 37 cases of widgets at one time to minimize costs and maintain inventory levels efficiently.

Optimizing Inventory Management with Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) is a calculation used to determine the optimal order quantity that a company should purchase to minimize total inventory costs. The formula for EOQ is as follows:

EOQ = √((2 × Demand × Ordering Cost) / Holding Cost)

Demand: The demand for widgets is given as 2 clocks per week, which translates to 104 clocks per year.

Ordering Cost: The retailer incurs a fixed charge of $65 for each order.

Holding Cost: The cost of holding one widget in inventory for one year is $0.93. Since the widgets are offered in cases of 15 each, the holding cost per case is calculated to be $13.95.

By plugging in the values for demand, ordering cost, and holding cost into the EOQ formula, we can determine the optimal order quantity of cases. The calculated EOQ is approximately 36.76, which means the retailer should purchase 37 cases of widgets at one time to achieve cost efficiency and effective inventory management.

By utilizing the EOQ model, retailers can ensure that they maintain optimal inventory levels, reduce holding and ordering costs, and enhance overall operational efficiency. It is essential for businesses to analyze various factors impacting inventory management to make informed decisions and improve profitability.