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Material classification, EOQ, GiT and re-order level

Short answer

ABC classification based on annual consumption value is most beneficial because it concentrates management effort on high-value items. With annual demand 6000 bags, ordering cost Rs 25000, and holding cost 15% of unit price (assumed Rs 900/bag), EOQ = sqrt(2×6000×25000/135) ≈ 1491 bags. Lead-time demand of 150 bags is less than EOQ, so goods in transit = 0; reorder level = 150 + 190 = 340 bags.

Which classification basis for materials would be beneficial for planning the construction materials and why? A construction site of residential building with large floor area requires 6000 bags of cement in a year where a material supplier promised to supply within the five working days after placing the order. If site requires storage area separately which costs 15% storing charge per unit per year at that locality? Construction work will be carried for 200 days in a year and site engineer is planning for ordering the quantity of cement at a time by considering ordering cost per order of Rs 25000 charged by material supplier. What quantity can be suggested as EOQ. Is there any goods in transit (GiT)? If yes, calculate GiT too. What would be the re-order level, if site engineer wants to minimum 190 bags of cement as minimum safety stock?

Classification basis

The ABC classification (annual consumption value basis) is the most beneficial for planning construction materials. It picks out the few high-value items (steel, cement) that need tight control, careful ordering and supplier follow-up, and the many low-value items that need only simple control, so effort and capital are used where the saving is greatest.

Data and assumptions

  • Annual demand D=6000D = 6000 bags; working days = 200, so daily use = 6000/200 = 30 bags/day.
  • Ordering cost Co=C_o = Rs 25,000 per order; lead time = 5 days; safety stock = 190 bags.
  • Storing charge = 15% of the unit price per year. The unit price is not given, so it is assumed to be Rs 900 per bag; then Ch=0.15×900=C_h = 0.15 \times 900 = Rs 135 per bag per year.

EOQ

EOQ=2DCoCh=2×6000×25000135=1490.7 bagsEOQ = \sqrt{\frac{2 D C_o}{C_h}} = \sqrt{\frac{2 \times 6000 \times 25000}{135}} = 1490.7\ \text{bags}

So about 1,491 bags per order (about 4 orders a year). (If the charge is read as Rs 15 per bag per year, EOQ = 4,472 bags; the GiT and re-order level results below do not change.)

Goods in transit (GiT)

Goods in transit exist at the time of re-ordering only if an earlier order is still on its way, i.e. if the lead-time consumption is more than the EOQ (lead time longer than the order cycle).

  • Lead-time consumption = daily use x lead time = 30 x 5 = 150 bags
  • Order cycle = EOQ/daily use = 1491/30 = about 50 days, which is much longer than the 5-day lead time.

Since 150 bags < 1,491 bags, each order arrives long before the next one is placed. So there are no goods in transit: GiT = 0.

Re-order level

ROL=lead-time consumption+safety stock−GiT=150+190−0=340 bagsROL = \text{lead-time consumption} + \text{safety stock} - GiT = 150 + 190 - 0 = 340\ \text{bags}

Answer: EOQ = 1,491 bags (for the assumed Rs 900/bag); no goods in transit (GiT = 0, because the lead-time demand of 150 bags is less than the EOQ); re-order level = 340 bags.

✓ Answer checked by Claude Opus 5.5 (high effort)

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