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4. Modern inventory management approaches

Two of the modern inventory management approaches are Just In Time (JIT) inventory management (Wikipedia, 2007) and Vendor Managed Inventory (Wikipedia, 2007).

a. In JIT system, the inventory is reduced and hence the associated cost of keeping the inventory. The inventory is ordered at the re-order point, this saves warehouse space and cost and increases return on investment, quality and efficiency.

A drawback of this approach is that re-order level is determined by historical demand which may not be the accurate forecasting measure. This might lead to inventory depletion and customer service issues. Another drawback is that the system becomes vulnerable to supply shocks. that is, a sudden increase in the price of inventory item. This may disturb the budgets.

b. Vendor Managed Inventory is a model where the buyer provides certain information to the supplier who then takes responsibility to maintain an agreed level of inventory for the buyer. This model was successfully used for some time but it makes the buyer too dependent upon the supplier or availability of raw materials and inventory items.

5.

a. H = hC = (0.1)(90-5) = $8.5

Q* = {(2)(S)(D) / H }1/2

= {(2)(25)(4,000)/8.5}1/2

= 153 units (approximately)

Since, Q* &lt. 500, hence if we order 153 units, the discounts can not be taken. If 500 units are ordered, the discount of $5 can be obtained per unit. But if order more than 500 units, the order and inventory carrying costs will increase without reducing the material cost.

Hence, the optimal order size in this case is 500 units.

b. H = hC = (0.1)(90-6) = $8.4

Q* = {(2)(S)(D) / H }1/2

= {(2)(25)(4,000)/8.4}1/2

= 154 units (approximately)

Since, Q* &lt.