7. Value Electronics has a yearly demand of 100,000 units for their tablet. The

Question

7.

Value Electronics has a yearly demand of 100,000 units for their tablet. The order processing cost per order is $2,000, and inventory holding cost is $100/item/year. They have opted for the reorder point system, and it has two options for transportation: by truck and by rail. Truck transportation takes 1 week, while rail transportation takes 2 weeks of lead time. Truck transportation costs $2 per tablet, while by rail the transportation cost is $1 per tablet. It is the policy of Value Electronics to hold enough inventories to cover demand for twice the lead time.

Calculate the reorder point for the truck scenario.

Explanation / Answer

reorder point= safety stock + lead time demand

lead time demand= lead time * average daily usage

the average daily usage= 100,000/365= 274 units (i have taken the firm runs for 365 days in an year)

the lead time is 1 week

lead time demand= 7*274= 1918 units

safety stock= (maximum usage* maximum lead time)- (average usage* average lead time in days)

here we can assume the lead time demand is the base for reorder, because we do not provided the maximum lead time

so the reorder point level is 1918 units

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