Your firm uses a periodic review system for all SKUs classified, using ABC analy

Question

Your firm uses a periodic review system for all SKUs classified, using ABC analysis, as B or C items. Further, it uses a continuous review system for all SKUs classified as A items. The demand for a specific SKU, currently classified as an A item, has been dropping. You have been asked to evaluate the impact of moving the item from continuous review to periodic review. Assume your firm operates 52 weeks per year; the item's current characteristics are: Demand (D)= 14,040 units/year Ordering cost (S) = $120.00/order Holding cost (H) = $2.50/unit/year Lead time (L)= 6 weeks Cycle-service level = 97% Demand is normally distributed, with a standard deviation of weekly demand of 78 units. a. Calculate the item's EOQ EOOunits. (Enter your response rounded to the nearest whole number)

Explanation / Answer

Cycle service level and Lead time have no effect for calculation of EOQ . They are used to calculate Safety stock and reorder points respectively.

Economic Order quantity ( EOQ ) is defined as :

EOQ = Square root ( 2 X Co x D/Ch)

Where D = Annual demand = 14040 units

Ordering cost = Co = $120 / order

Annual unit Holding cost = Ch = $2.5

Therefore ,

EOQ = Square root ( 2 x 120 x 14040 / 2.5)

          = Square root ( 1347840)

            = 1160.96 ( 1161 rounded to next whole number )

EOQ = 1161 UNITS

EOQ = 1161 UNITS

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