Suppose that an auto part in a manufacturer\'s inventory has the following chara

ID: 387973 • Letter: S

Question

Suppose that an auto part in a manufacturer's inventory has the following characteristics:

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Forecast of demand = 900 cases per week

Forecast error, std. dev. = 125 cases per week

Lead time = 4 weeks

Carrying costs = 30% per year

Purchase price, delivered = $60 per case

Replenishment order cost = $40 per case

Stockout cost = $10 per case

Probability of being in stock during the lead time = 85%

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(These questions are from the information above.)

The manufacturer uses ROP method to control the inventory of this item. The manufacturer operates 52 weeks a year.

1.) What is the economic order quantity?

2.) What is the reorder point?

3.) What's the expected number of units out of stock annually?

4.) What is the annual service level?

5.) What's the total annual cost including annual fixed ordering cost, inventory holding cost, and stockout cost?

6.) If the lead time is normally distributed with a standard deviation of 0.5 weeks, what's the ROP?

Economic Order Quantity calculation formula is- Square Root of [(2 x Demand x Ordering Costs) /Carrying Cost]

Demand forecast = 900 cases per week. Yearly = 900*52 = 46800 cases

Replenishment ordering cost= $40 per case

Carrying cost = 30% i.e. .3

Economic Order Quantity is = Square Root of [(2*900*40)/.3] = 489.89

Reorder Point

Reorder point: The reorder point is the time when the next order should be placed.

Reorder Point = Average usage rate x Lead time)

Reorder Point = 900*4 = 3600

Expected number of units out of stock annually?

= 46800*.15 = 7020.

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