FE Industrial & Systems Practice Question Solution included after investigation
CASE E-083 · FE

The Inventory Policy That Ordered 707 Units, Not 10,000

Ordering the full annual demand once minimized ordering frequency, not total inventory cost. The EOQ was about 707 units.

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Case E-083 engineering failure visual
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2

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3

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4

Fix

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5

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Case Brief

SAME PRINCIPLES. HIGHER STANDARDS.
PROBLEM STATEMENT

An item has annual demand D=10,000 units/year. Each replenishment order costs $50, and annual holding cost is $2 per unit-year. Assume constant demand, instantaneous replenishment, no shortages, and no quantity discounts. A purchasing note recommends ordering all 10,000 units once per year because that minimizes ordering frequency. Determine the economic order quantity and the annual ordering plus cycle-stock holding cost at EOQ.

Manufacturing Service Production Systems Industrial Systems Design Verification Root Cause Analysis Safe Correction
E-083
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CASE CLOSED · ENGINEERING VERDICT

What actually failed — and what should change.

What failed

The policy minimized the number of orders instead of total relevant inventory cost.

What was missed

Larger order quantities create larger average inventory and higher holding cost.

Corrected model

Use Q*=sqrt(2DS/H) under the stated EOQ assumptions.

QUICK ANSWER

EOQ=sqrt(2DS/H)=sqrt[2(10,000)(50)/2]=sqrt(500,000)=707.1 units. At EOQ, annual ordering and holding costs are each about $707.1, for about $1,414.2 total relevant annual cost.

ENGINEERING TAKEAWAY

EOQ balances annual ordering cost DS/Q against annual cycle-stock holding cost HQ/2, producing Q*=sqrt(2DS/H).

CASE QUESTIONS

Questions this case should settle.

What is the EOQ formula?

Q*=sqrt(2DS/H) under the standard deterministic EOQ assumptions.

Why not order the full annual demand once?

That minimizes order frequency but creates excessive average inventory and holding cost.

NEXT FE PRACTICE QUESTION

The Forecast That Moved to 109, Not 130

Manufacturing Service Production Systems · 5–10 min

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