5. Given the following information, formulate a continuous-review inventory mana

Question

5. Given the following information, formulate a continuous-review inventory management system. The item is demanded 50 weeks a year. Item cost $80 Standard deviation of weekly demand Order cost $100 25 per week Annual holding cost (%) 10% of item cost Lead time 1 week Annual demand 25,000 Service probability 97% Average demand 500 per week Compute the order quantity and reorder point. (14 points) For order quantity, please provide the formula, at least one step of calculation, and the correct value for full credit. For reorder point, please provide the formula, at least one step of calculation, the correct z value, and the correct answer for full credit.

Explanation / Answer

Annual Demand 25000 Ordering Cost $ 100.00 Holding Cost ( 80 * 10%) $       8.00 EOQ = 2AO / H where A = Annual Demand O = Ordering Cost per order H = Holding Cost per unit per annum EOQ = 2AO / H = (2 * 25000 * 100) / 8 = 790.5694 units or, 791 units b. Mean Demand per mean 500 Standard Deviation of Daily Demand (SDd) 25 Lead Time (weeks) 1 Standard Deviation of Lead Time (SDl) = SDd * Lead Time = 25*1 = 25 25.00 Service Level Desired 97% Z Value at 97% 1.881 Safety Stock for 97% service level Z value * Standard Deviation (Demand Lead Time) (25 * 1.881) 47 Lead Time Demand ( Lead Time * Avg Demand) 500 Reorder Point = Lead Time Demand + Safety Stock 547

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