Question

A. Kleenway supermarket is comparing the two approaches to inventory management: Continuous review and periodic review: Use both approaches to evaluate the cost and recommend a method for Kleenway. Data given below.      

Distribution of weekly demand	Normal
Mean	1000 units per week
Standard Deviation of weekly demand	250 units
Holding cost	0.20 per unit per week
Ordering cost	2500
Lead time	4 week
Service level Desired	90%
Review period (when using periodic review)	5 weeks
Number of weeks per year	50
Cost per unit	100

Continuous review system	Formula used (with numbers substituted for variables)	Value obtained
EOQ
Mean lead time demand
s.d. Lead time demand
Z value for a service level of 90%
Safety stock
Reorder Level
Total expected ordering cost per year
Total expected holding cost per year
Total expected cost per year
Service level if SS is reduced by 300 units

Periodic review system	Formula used (with numbers substituted for variables)	Value obtained
Mean demand during (lead time + review period )
s.d. of demand during (lead time + review period )
Z value for a service level of 90%
Safety stock
Order up to Level
Total holding cost per year
Total ordering cost per year
Total cost per year

If there was no additional cost for continuous review, will that always be better than periodic review?             Yes or No     explain  

Answer 1

Continuous review system	Formula used (with numbers substituted for variables)	Value obtained
EOQ	=(2*1000*2500/0.2)^0.5	5000
Mean lead time demand	=1000*4	4000
s.d. Lead time demand	=250*4^0.5	500
Z value for a service level of 90%	=NORMSINV(0.9)	1.28
Safety stock	=1.28*500	640
Reorder Level	=4000+640	4640
Total expected ordering cost per year	=1000*50*2500/5000	25000
Total expected holding cost per year	=5000/2*0.2*50	25000
Total expected cost per year	=25000+25000	50000
Service level if SS is reduced by 300 units	=NORMSDIST((640-300)/500)	75.17%

Periodic review system	Formula used (with numbers substituted for variables)	Value obtained
Mean demand during (lead time + review period )	=1000*(4+5)	9000
s.d. of demand during (lead time + review period )	=250*(4+5)^0.5	750
Z value for a service level of 90%	=NORMSINV(0.9)	1.28
Safety stock	=1.28*750	960
Order up to Level	=9000+960	9960
Total holding cost per year	=1000*5/2*0.2*50	25000
Total ordering cost per year	=50/5*2500	25000
Total cost per year	=25000+25000	50000

If there was no additional cost for continuous review, will that always be better than periodic review?             Yes or No     explain  

Yes, continuous review will always be better than periodic review, because , continuous review is more accurate and takes exact demand into consideration on a continuous basis, so there's tighter inventory control.