iBod begins a review of ordering policies for its continuous review system by ch
ID: 362599 • Letter: I
Question
iBod 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 65 units/ week (assume 52 weeks per year) Ordering cost $60/ order Holding cost $11/ unit/ year Lead time = 2 weeks Standard deviation of weekly demand 13 units cycle-service level = 88 percent 8. What is the EOQ for this item? What is the desired safety stock? a. b. Dr.H. Pg.3 What is the reorder point? what are the cost implications if the current policy for this item is Q= 200 and Safety stocks 180? (Hint: compare the total annual inventory costs for previous and current policy) iBod decided to change toperiodic review system to control the inventory. A recent review shows that the inventory for this item is 200 units. There were no scheduled receipts or backorders at the time. How many units should be ordered if today is the review day? (Hint: Calculate time between orders as the approximation of the time between reviews; expressed in weeks). c. d, e.Explanation / Answer
a) EOQ = sqrt(2*Annual Demand*Order cost/Holding cost)
Annual demand = 65*52 = 3380
EOQ = sqrt(2*3380*60/11) = 192 units
b) Desired safety stock = z*Standard deviation*sqrt(Lead time)
z value for 88% service level is 1.17
Safety stock = 1.17*13*sqrt(2) = 21.51
c) Reorder point = Demand*Lead time + Safety stock
Reorder point = 65*2 + 21.51 = 151.51
d) In case Q = 192
Annual Holding cost = Q/2*Holding cost = 192/2*11 = 1056
Annual ordering cost = Annual demand/Q*Order cost = 3380/192*60 = 1056.25
Total = 2112
Now, Q = 200
Annual Holding cost = Q/2*Holding cost = 200/2*11 = 1100
Annual ordering cost = Annual demand/Q*Order cost = 3380/200*60 = 1014
Total = 1100+1014 = 2114
So, cost will increase
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