Consider the following information on an inventory management system: Item Cost: $10 Order Cost: $250 Annual Holding Cost: 33% of item cost Annual Demand: 25,750 Average Demand: 515 per week Std. Dev....

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General Management

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?

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3.9 Ratings (503 Votes)

Given details Annual demand D 25750 Ordering cost Co 250 Annual unit holding cost Ch 33 of 10 33 Optimal order quantity square root 2 x Co x D Ch Square root 2 x 250 x 25750 33 197522 1975 rounded to nearest whole number OPTIMAL ORDER QUANTITY 1975 UNITS Annual ordering See Answer

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