Problem 3 Digital Plaza is a local electronics store. You are asked to determine

Question

Problem 3 Digital Plaza is a local electronics store. You are asked to determine the optimal ordering policy for Samsong 40 Inch LED TV. The weekly demand for this LED TV is normally distributed with a mean of 55 units and standard deviation of 15 units. The store follows the continuous review EOQ model to manage its inventory. Digital Plaza orders Samsong 40 Inch LED TV from the supplier at a unit cost of $220 and the fixed ordering cost of $200. The annual cost of carrying a unit of inventory at the store is equal to 30% of the unit cost. It takes 21 days to receive a delivery. Assume that a year has 52 weeks. (Note: z-values corresponding to standard normal probabilities can be calculated using Excel or can be found in the table provided at the end of the problem) a. How many Samsong 40 Inch LED TVs should be included in each order Digital Plaza places foir this LED TV? That is, compute the Compute the Economic Order Quantity that Digital Plaza should use. b. Compute the safety stock (units of TV) needed to maintain a service level of 95%. What is the annual holding cost for carrying this safety stock? Compute the reorder point for 95% service level. How much additional safety stock would be needed if Digital Plaza wishes to increase the service level from 95% to 98%? what is the additional cost associated with this increase in the safety stock? c. d. e.

Explanation / Answer

Annual Demand = weekly demand X 52 Weeks = 55*52 = 2,860

Ordering Cost = $200

Holding Cost = 30% X $220 = $66

Question a

Economic Order Quantity is computed as Squareroot(2XDemandXOrdering Cost/Holding Cost) = Sqrt(2X2860X200/66) = 131.6561

Hence the Optimal Order Quantity is about 132 Units.

Question b

The lead time is about 3 weeks(21 days) for which 3 weeks of safety stock would be required

at a 95% service level it would be necessary to carry 1.65 Standard deviations of stock which would be

3weeks X 15 X 1.65 = 74.25 or 75 Units of Safety Stock

Question c

The Annual Holding cost of carrying stock is 75 X 66 = 4,950

The entire 75 units is used instead of the dividing by 2 since the safety stock is presumed be in existance throughout the year. There will be no depletion from this stock.

Question d

Re-order Point = Lead Time Consumption + Safety Stock = 3 weeks X 55 units + 75 = 240 units.

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