Appliances for Less is a local appliance store. It cost this store $23.3 per uni

Question

Appliances for Less is a local appliance store. It cost this store $23.3 per unit annually for storage, insurance, and so forth to hold microwaves in its inventory. Sales this year are anticipated to be 219 units. Each order costs $99. The company is using the Economic Order Quantity model in placing the orders. It takes approx. 2 day(s) for the company to receive an order after it has been placed. If the store insists on a 2 day safety stock (assume 365 days a year), what should the inventory level be when a new order is placed?

Explanation / Answer

Re-order level = Safety stock + Lead time consumption.

Safety stock is the reserve stock kept by an organization to meet the demand if the ordered inventory is not received on time.

Lead time consumption is the consumption of inventory during the time interval between placing an order and receiving it from the supplier.

Average consumption per day = Total annual demand / Number of days in a year

= 219 / 365 = 0.60 units per day.

Lead time consumption = Average consumption x Lead time = 0.60 x 2 = 1.20 units

Safety stock = 2 days = 2 x 0.60 = 1.20 units

So, Re-order level = Safety stock + Lead time consumption = 1.20 + 1.20 = 2.40 units.

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