(3) Inventory Optimization Demand for refrigerators at a local Home Depot is 1,0
ID: 2802314 • Letter: #
Question
(3) Inventory Optimization Demand for refrigerators at a local Home Depot is 1,000 per year. The cost of each refrigerator to HD is $300, and the holding cost is 3% per year. There is a fixed cost of $50 per order, regardless of size, to cover processing. # of refrigerators (3a) What is the Economic Order Quantity? (3b) t takes two weeks from time of order for a new refridgerator to be delivered to HD, and the coefficient of variation on demand for refrigerators is 30%. If HD's target Custormer Service Level (CSL) is 90%, what is the Reorder Point for inventory, the level at which new refrigerators should be ordered? # of refrigerators ROP (3c) If instead of CSL, HD targets Fill Rate (FR) is 95%, what is the Reorder Point? # of refrigerators ROPExplanation / Answer
3 a) EOQ = SQRT ((2 × Quantity Demanded × Cost Per Order ) / Holding Cost Per Order)
Holding cost = 3% of cost of refrigerator= 0.03*$300= $9 per year
Cost per order = $50per year
Quantity Demanded = 1000 per year
EOQ = SQRT ((2 × Quantity Demanded × Cost Per Order ) / Holding Cost Per Order)
EOQ= SQRT ((2* 1000 * $50) / $9)
EOQ = 105.41 = 105 (approximately because EOQ is a number and it can’t be a fraction)
So
EOQ= 105 per year
3 b) Lead time = 2 weeks
Demand per year = 1000 and per week = 1000/52= 19
Coefficient of variation on demand = 30%
CV = [Standard deviation () / Mean ] * 100
30% = [standard deviation () / 19] * 100
0.3= [Standard deviation () / 19]
Standard deviation () = 0.3*19= 6
Re order point if HD want to have CSL of 90% is
Z value can be obtained from normal distribution (Z- table) which at 90% is Z=1.28
R= (19*2) + [1.28*6*SQRT(2)]
R= 48.86 =49 (approximately because EOQ is a number and it can’t be a fraction)
R= 49 per week
3 c) ROP if HD targets a fill rate of 95%
ROP = demand * lead time
Re order point with a lead time of two weeks is= ROP= 19*2 =38
Fill rate = Expected percentage of demand met during each cycle
ROP with an expected fill rate of 95% is = 0.95*38= 36 (when demand per week has no deviation)
ROP= 36
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