Retailers Warehouse (RW) is an independent supplier of household items to depart

Question

Retailers Warehouse (RW) is an independent supplier of household items to department stores. RW attempts to stock enough items for a 90 percent service probability.

A stainless steel knife set is one item it stocks. Demand (3,400 sets per year) is relatively stable over the entire year. Whenever new stock is ordered, a buyer must assure that numbers are correct for stock on hand and then phone in a new order. The total cost involved to place an order is about $13. RW figures that holding inventory in stock and paying for interest on borrowed capital, insurance, and so on, add up to about $12 holding cost per unit per year.

Analysis of the past data shows that the standard deviation of demand from retailers is about four units per day for a 365-day year. Lead time to get the order is seven days.

a. What is the economic order quantity? (Round your answer to the nearest whole number.)

b. What is the reorder point? (Use Excel's NORMSINV() function to find the correct critical value for the given -level. Do not round intermediate calculations. Round "z" value to 2 decimal places and final answer to the nearest whole number.)

Explanation / Answer

Annual Demand = 3400 sets

z at 90% service level = 1.645

Ordering/setup cost(S) = 13 $

Holding cost (H) = 12 $ per unit

a) EOQ = SQRT(2*D*S/H) = SQRT(2*3400*13/12) = 86 sets

b) Reorder point = Demand during Lead Time+Safety Stock = d*L+z**L = (3400/365)*7+1.645*4*7 = 83 sets

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