Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

22 points) Erin Manufacturing places orders for cylinders every week. Demand for

ID: 380854 • Letter: 2

Question

22 points) Erin Manufacturing places orders for cylinders every week. Demand for the cylinders is normally distributed with a mean of 50 units per day and a standard deviation of 10 units per day. The cylinders take 9 workdays to arrive. The company operates 350 days per year. Erin strives to provide a 996% cycle service level. It costs the company year, and it costs $100 in ordering costs every time that an order is placed. $2 to hold one cylinder in inventory for a a. How many units of safety stock should be held? (8 points) b. What should the target inventory level b?(6 pointy) c. Suppose that it is time to order. On-hand inventory 35 units. How many units should be ordered now? (4 points) If Erin Manufacturing decided to implement a continuous review inventory system, how much money per year would the firm save in safety stock holding costs compared to its current system? (5 points) d.

Explanation / Answer

Answer to Q.1:

Standard deviation of daily demand of cylinder = 10

Lead time of delivery of cylinder = 9 days

Hence, standard deviation of demand during lead time

= Standard deviation of daily demand x Square root ( Lead time )

= 10 x Square root ( 9)

= 10 x 3

= 30

Required service level = 99.6% ( i.e. in stock probability 0.996 )

Hence, corresponding Z value = NORMSINV ( 0.996) = 2.652

Therefore ,

Safety stock = Z value x Standard deviation of demand during lead time

                     = 2.652 x 30

                        = 79.56 ( 80 rounded to nearest whole number )

SAFETY STOCK = 80

Answer to Q,2:

Reorder point

= Mean daily demand x Lead time + Safety stock

= 50 x 9 + 80

= 450 + 80

= 530

Cycle inventory fluctuates between 450 and 0 at steady rate and safety stock remains unchanged.

Thus,

Target inventory level = Average cycle inventory + Safety stock = 450/2 + 80 = 225 + 80= 305

TARGET INVENTORY LEVEL = 305 CYLINDERS

Answer to Q.3 :

Since on hand inventory = 35 cylinders,

Quantity should be ordered = Reorder point = 35 = 530 – 35 = 495

495 CYLINDERS SHOULD BE ORDERED

Answer to Q.4:

Annual demand for cylinders = D = 50 X 350 = 17500 units

Ordering cost = Co = $100

Unit inventory holding cost = Ch = $2

Thus Economic Order Quantity ( EOQ ) as per continuous review inventory system

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

= Square root ( 2 x 100 x 17500 / 2)

= 1322.87 ( 1323 )

Thus EOQ = 1323

There will be no safety stock requirement under continuous review system

Holding cost of safety stock under current periodic review system

= Ch x safety stock

= $2 x 80

= $160

COMPANY WOULD SAVE = $80

SAFETY STOCK = 80

Hire Me For All Your Tutoring Needs
Integrity-first tutoring: clear explanations, guidance, and feedback.
Drop an Email at
drjack9650@gmail.com
Chat Now And Get Quote