Osprey Sports stocks everything that a musky fisherman could want in the Great N

Question

Osprey Sports stocks everything that a musky fisherman could want in the Great North Woods. A particular musky lure has been very popular with local fishermen as well as those who buy lures on the Internet from Osprey Sports. The cost to place orders with the supplier is $40/order, the demand averages 3 lures per day, with a standard deviation of 1 lure; and the inventory holding cost is $1.00/lurelyear. The lead time form the supplier is 9 days, with a standard deviation of 2 days. It is owners the opportunity to fish for muskies during the prime season. The owners want to use a continuous review inventory system for this item. Refer to the standard normal table for z-values. a. What order quantity should be used? 290 lures. (Enter your response rounded to the nearest whole number) b. What reorder point should be useures.(Enter your response rounded to the nearest whole number)

Explanation / Answer

S = Ordering cost = $40
d = Average daily demand = 3
sd = Std. deviation of daily demand = 1
H = holding cost per year = $1.00
L = average lead time = 9 days
sl = Std. deviation of lead time = 2 days
Service level = 95% so Z = NORMSINV(0.95) = 1.645

(a)

EOQ = (2.D.S/H)1/2 = sqrt(2*350*3*40/1) = 289.8 or 290 days

(b)

ROP = Average Lead time demand + Safety Stock(SS)

Average Lead time demand = L x d = 9 x 3 = 27

SS = Z x sltd where sltd = std. deviation of lead time demand and is given by -

sltd = (sd2 x L + d2 x sl2)1/2 = sqrt(1^2*9+(3*2)^2) = 6.71

So, SS = Z x 6.71 = 1.645 x 6.71 = 11.03

and, ROP = 27 + 11.03 = 38.03 or 38 (try 39 also due to possiblity of rounding up to next whole number)

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