Assume the company operated 250 days per year, expects to use 120,000 units per

Question

Assume the company operated 250 days per year, expects to use 120,000 units per year and uses a perpetual review inventory control system. Assume further they use Banner Freightways which has an average transit time of 3 days with a standard deviation of 2 days, and daily demand is normally distributed with a standard deviation of 50 units. The unit cost continues to be $480. The annual cost of carrying inventory has been recalculated to be 2% per month of the value of the part.

A) Calculate the Economic Order Quantity (EOQ)

B) Calculate the necessary safety stock to cover 98% of the replenishment cycles.

C) Assume North Eastern has an average lead time of 5 days with a 4 day standard deviation. How much lower should its rate be compared to Banner’s in order to offset the service differences between the two carriers?

Explanation / Answer

No of working days 250 Annual demand 120000 Average lead time 3 Std deviation of Lead time 2 Average daily demand 480 Std deviaton of demand 50 Unit cost 480 Inventory carrying cost 115.2 Per yr a Ordering cost is required to calculate EOQ b Service level 98% Average demand during lead time 1440 Std dev of demand during lead time 963.90 Reorder point 3,419.61 Using normal distribution for 98% Safewty stock 1,979.61 Reorder point - average demand during lead time

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