A company begins a review of ordering policies for its continuous review system
ID: 331141 • Letter: A
Question
A company begins a review of ordering policies for its continuous review system by checking the current policies for a sample of SKUs. Following are the characteristics of one item.
Demand = 64 units/week (Assume 52 weeks per year)
Ordering and setup cost = $50/order
Holding cost = $13/unit/year
Lead time = 2 weeks
Standard deviation of weekly demand = 12 units
Cycle-service level = 88 percent
Develop the best policies for a periodic review system. What value of P gives the same approximate number of orders per year as the EOQ? Round to the next nearest week.
1 week
3 weeks
5 weeks
None of the above
Develop the best policies for a periodic review system. What safety stock and target inventory level provide an 88 percent cycle-service level?
32 units and 352 units
27 units and 347 units
53 units and 370 units
None of the above
a.1 week
b.3 weeks
c.5 weeks
d.None of the above
Explanation / Answer
Given that,
Demand, d = 64 units/week (Assume 52 weeks per year)
Annual Demand, D = 64*52 = 3328
Ordering and setup cost, S = $50/order
Holding cost, H = $13/unit/year
Lead time, L = 2 weeks
Standard deviation of weekly demand, s = 12 units
Cycle-service level = 88 percent
1) EOQ = SQRT(2DS/H) = SQRT(2*3328*50/13) = 160 units
P = Q/d = 160/64 = 2.5 ~ 3 weeks
ANSWER: b. 3 weeks
2) z-stat for 88 percent CSL = NORMSINV(.88) = 1.175
Safety stock = z*s*SQRT(P+L) = 1.175*12*SQRT(3+2) = 32 units (rounded-off)
Target inventory level = d*(P+L) + safety stock = 64*(3+2) + 32 = 352 units
ANSWER: a. 32 and 352 units
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