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Hello John, kindly help me to find the maximum inventory level for this question:
A company has an inventory management policy which requires ordering 50,000 units when the inventory level falls to 15,000 units. Forecast demand to meet production requirements during the next year is 310,000 units. You should assume a 50-week year and that demand is constant throughout the year. Orders are received 2 weeks after being placed with the supplier. What is the maximum inventory level?
The demand per week is 310,000 / 50 = 6,200 units.
Given that it takes two weeks for an order to arrive, during this time they will sell 2 x 6,200 = 12,400 units.
The place an order when they have 15,000 units in inventory, and so immediately before the new order arrives they will have 15,000 – 6,200 = 8,800 units.
The new order then arrives and so they will then have 8,800 + 50,000 = 58,800 units, and this is the maximum inventory level (because from then on they will be selling units and the inventory level will fall until it gets to 15,000 when they will then places another order).
Thank you John.
I am still quite confused.
Now, I have seen the formula for minimum inventory as well.In the solution you provided, what is the minimum usage? What is the minimum lead time?
Is minimum usage= average usage?
Is minimum lead time = average lead time?
(As per minimum inventory formula)The formula for maximum inventory level in the BPP study text is
Re-order level + re-order quantity less (minimum usage × minimum lead time)It appears that 15,000 is the re-order level but you used 8800. I still don’t understand that part. What is the use of 12,400 units in the calculation? Please can you place the figures in the bpp formula to arrive at the same answer?
Thank you for your time.Minimum usage and minimum lead time are only relevant when the usage per week and/or the lead time can vary. In your question they are not relevant because the question says that the lead time is 2 weeks, and that the demand is constant. Therefore the demand over the lead time in your question is fixed at 8,800 units.
The calculation I have shown is exactly as per the formula you quote from BPP.
The recorder level – (usage per week x lead time)
I have not used 8,800 as the re-order level at all. I have used 15,000 as the re-order level.
If you are still unsure then do watch my free Paper MA lectures on the management of inventory, because although the EOQ is re-examined in Paper FM, it is very unlikely that maximum inventory levels will be examined because it is examined in Paper MA.
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