A manager of an inventory system believes that inventory models are important decision-making aids. Even though often using an EOQ policy, the manager never considered a backorder model because of the assumption that back orderes were “bad” and should be a avoided. However, with upper management’s continued pressure for cost reduction, you have been asked to analyze the economics of a backorder policy for some products that can possibly be backordered.
For a specific product with D = 800 units per year, Co = $150, Ch = #3, and Cb = $20, what is the difference in total annual cost between the EOQ model and the planned shortage or backorder model?
If the manager adds constraints that no more than 25% of the units can be backordered and that no customer will have to wait more than 15 days for an order, should the backorder inventory policy be adopted?
Assume 250 working days per year.