sample inventory management problems and apply what we have learned. 2.Foster Dr

Question

sample inventory management problems and apply what we have learned.

2.Foster Drugs, Inc., handles a variety of health and beauty aid products. A particular hair conditioner product costs Foster $2.95 per unit. The annual holding cost rate is 20 percent. Using an EOQ model, they determined that an order quantity of 300 units should be used. The lead time to receive an order is one week, and the demand is normally distributed with a mean of 150 units per week and a standard deviation of 40 units per week.

a. What is the reorder point if the firm is willing to tolerate a 1-percent chance of a stock out during an order cycle?

b. What safety stock and annual safety stock cost are associated with your recommendation in part a

Explanation / Answer

a). 1 pecent tolerance for stock out meaning 99% (100 - 1) service level . So Reorder point

= µD*L + Z*D*L = 243 units

b). Safety Stock = Z*D*L = 93 units

Annual safety stock cost = 93*2.95*20% = $ 54.89

Weekly Demand µD = 150 Standard Deviation of Weekly Demand D = 40 Lead Time (Weeks) L = 1 Service level SL = 99.00% Z-value corresponding to Service Level Z = 2.33 Safety stock ss = Z*D*L 93.04 Reorder Point ROP = µD*L + ss 243.04

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