Your firm uses a periodic review system for all SKUs. Further, it uses a continu
ID: 465328 • Letter: Y
Question
Your firm uses a periodic review system for all SKUs. Further, it uses a continuous review system for all SKUs classified as A items. The demand for a specific SKU, currently classified as an A item, has been dropping. You have been asked to evaluate the impact of moving the item from continuous review to periodic review. Assume your firm operates 52 weeks per year; the item's current characteristics are: Demand (D) = 14,040 units/year Ordering cost (S) = $130.00/order Holding cost (H) = $2.50/unit/year Lead time (L) = 8 weeks Cycle-service level = 97% Demand is normally distributed, with a standard deviation of weekly demand of 68 units. a. Calculate the item's EOQ. EOQ = units. (Enter your response rounded to the nearest whole number.) b. Use the EOQ to define the parameters of an appropriate continuous review and periodic review system for this item. Refer to the standard normal table when necessary. Under a continuous review system, order units whenever the inventory level drops to units. (Enter your responses rounded to the nearest whole number.) Under a periodic review system, order up to units every weeks. (Enter your responses rounded to the nearest whole number.) c. Which system requires more safety stock and by how mu Ch? Select the correct choice below and fill in the answer box to complete your choice. The review system requires more units of safety stock than the review system. (Enter your response rounded to the nearest whole number.)Explanation / Answer
EOQ stands for Economic Order Quantity model for determining the optimum level of order quantity to have the minimum total cost of ordering and inventory carrying cost. Formula used is, EOQ = SQRT (2DS/H)
Putting the values of D=14040, S=130 and H=2.5 we get EOQ=1208.371 or say 1208 units
Given that demand follows normal distribution with standard deviation of weekly demand as 68 units whereas average weekly demand is 270 (14040/52)
Lead time is given as 8 weeks therefore lead time demand is having mean 2160 (270*8) and S.D. 192.33 (sqrt(8)*68) Cycle service level is 97% at which the value of standard normal is 1.88 therefore the level of safety stock is 362 approx. (1.88*192.33)
Reorder Point = Lead time demand + safety stock = 2160+362=2522
Therefore under continuous system place an order of 1208 units whenever inventory on hand is 2522 or 106 (2522-2*1208)
In case of periodic weekly review the safety stock = 1.88 * S.D. for( lead time + period) demand=1.88*204=384
Order upto level = Demand for lead time+period + Safety stock = 270*9 + 384 = 2814
Continuous system is also called fixed-order-quantity in which order is placed for the same constant amount whenever the inventory on hand decreases to a certain level.
Periodic system is also called fixed-time-period in which an order is placed for a variable amount after specific regular intervals.
c. Periodic system is having higher value of safety stock 22 (384-362)
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