Consider the following information on an inventory managementsystem:
ItemCost: $10
OrderCost: $250
Annual HoldingCost: 33% of item cost
AnnualDemand: 25,750
AverageDemand: 515 per week
Std. Dev. ofDemand: 125 per week
Leadtime: 2 weeks
1. Ignoring the uncertainty in the demand (i.e. looking only ataverage values), find the optimal order quantity and the reorderpoint. What is the annual inventory holding and ordering cost forthis policy?
2. Consider now the uncertainty. The order quantity remains thesame. If the target is to have a 98% fill rate, what should be thereorder point? What is the safety stock? How much additionalinventory cost is incurred due to the safety stock? What should bethe reorder point?
