A. Kleenway supermarket is comparing the two approaches to inventory management:
ID: 336067 • Letter: A
Question
A. Kleenway supermarket is comparing the two approaches to inventory management: Continuous review and periodic review: Use both approaches to evaluate the cost and recommend a method for Kleenway. Data given below.
Distribution of weekly demand
Normal
Mean
1000 units per week
Standard Deviation of weekly demand
250 units
Holding cost
0.20 per unit per week
Ordering cost
2500
Lead time
4 week
Service level Desired
90%
Review period (when using periodic review)
5 weeks
Number of weeks per year
50
Cost per unit
100
Continuous review system
Formula used (with numbers substituted for variables)
Value obtained
EOQ
Mean lead time demand
s.d. Lead time demand
Z value for a service level of 90%
Safety stock
Reorder Level
Total expected ordering cost per year
Total expected holding cost per year
Total expected cost per year
Service level if SS is reduced by 300 units
Periodic review system
Formula used (with numbers substituted for variables)
Value obtained
Mean demand during (lead time + review period )
s.d. of demand during (lead time + review period )
Z value for a service level of 90%
Safety stock
Order up to Level
Total holding cost per year
Total ordering cost per year
Total cost per year
If there was no additional cost for continuous review, will that always be better than periodic review? Yes or No explain
Distribution of weekly demand
Normal
Mean
1000 units per week
Standard Deviation of weekly demand
250 units
Holding cost
0.20 per unit per week
Ordering cost
2500
Lead time
4 week
Service level Desired
90%
Review period (when using periodic review)
5 weeks
Number of weeks per year
50
Cost per unit
100
Explanation / Answer
If there was no additional cost for continuous review, will that always be better than periodic review? Yes or No explain
Yes, continuous review will always be better than periodic review, because , continuous review is more accurate and takes exact demand into consideration on a continuous basis, so there's tighter inventory control.
Continuous review system Formula used (with numbers substituted for variables) Value obtained EOQ =(2*1000*2500/0.2)^0.5 5000 Mean lead time demand =1000*4 4000 s.d. Lead time demand =250*4^0.5 500 Z value for a service level of 90% =NORMSINV(0.9) 1.28 Safety stock =1.28*500 640 Reorder Level =4000+640 4640 Total expected ordering cost per year =1000*50*2500/5000 25000 Total expected holding cost per year =5000/2*0.2*50 25000 Total expected cost per year =25000+25000 50000 Service level if SS is reduced by 300 units =NORMSDIST((640-300)/500) 75.17%Related Questions
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