The Waterworks Plumbing Supply Company stocks thousands of plumbing items sold t
ID: 337053 • Letter: T
Question
The Waterworks Plumbing Supply Company stocks thousands of plumbing items sold to regional plumbers, contractors and retailers. James Sullivan, the firm’s general manager, wonders how much money could be saved annual if an Inventory Model was defined/used instead of the firm’s present rules of thumb, to determine an Optimal Inventory Policy. Material #3925 is externally sourced.
Because Waterworks supplies hundreds of regional plumbers, contractors and retailers, their operation experiences a probabilistic demand; in fact, the number of units demanded varies considerably from day-to-day and from week-to-week. Historical sales data (for Material #3925) indicate that demand during a one-week lead time can be described as having a Normal Probability Distribution with a mean of 190 units and a standard deviation of 35 units (1 unit = 1 brass valve, Material #3925).
Mike Wazowski develops the following estimates from accounting information:
Cost per valve = $1.60
Annual Inventory Holding Rate = 25%
Ordering Cost (per order) = $5.50
Working Days per Year = 250
Lead Time = 5 days
James Sullivan is willing to tolerate a stock-out rate of 5%. What is the recommended inventory decision (i.e., the order quantity and the reorder point)? And, how much Safety Stock will be made available to absorb higher-than-usual demand during the lead time? What is the associated cost of the Safety Stock? Finally, what is the anticipated Total Annual Cost for this inventory system/policy?
Explanation / Answer
The Waterworks Plumbing Supply Company stocks thousands of plumbing items sold to regional plumbers, contractors and retailers. James Sullivan, the firm’s general manager, wonders how much money could be saved annual if an Inventory Model was defined/used instead of the firm’s present rules of thumb, to determine an Optimal Inventory Policy. Material #3925 is externally sourced.
Because Waterworks supplies hundreds of regional plumbers, contractors and retailers, their operation experiences a probabilistic demand; in fact, the number of units demanded varies considerably from day-to-day and from week-to-week. Historical sales data (for Material #3925) indicate that demand during a one-week lead time can be described as having a Normal Probability Distribution with a mean of 190 units and a standard deviation of 35 units (1 unit = 1 brass valve, Material #3925).
Mike Wazowski develops the following estimates from accounting information:
Cost per valve = $1.60
Annual Inventory Holding Rate = 25%
Ordering Cost (per order) = $5.50
Working Days per Year = 250
Lead Time = 5 days
James Sullivan is willing to tolerate a stock-out rate of 5%. What is the recommended inventory decision (i.e., the order quantity and the reorder point)? And, how much Safety Stock will be made available to absorb higher-than-usual demand during the lead time? What is the associated cost of the Safety Stock? Finally, what is the anticipated Total Annual Cost for this inventory system/policy?
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