Question

I think I have this figured out, but need a double check... Thank you

Here is the question:

Regional distributors are currently using continuous review inventory policy. Compute and describe their inventory management policy and associated cost. Ignore inbound and outbound transportation cost. Provide answers and calculations for order quantity, demand during lead time, safety stock, average inventory level, inventory holding cost per week, ordering cost per week, and total cost per week.

The service level is 90% and the average lead time is 2 weeks.

Here is the style I used to answer.

	Q*	Ddlt	SS	Avg Inv	Inv cost	Ord Cost	Tot Cost
Atlanta
Boston
Chicago
Dallas
LA
	Total cost of the distribution system

Supporting info:

Inbound TRANSPORTATION COSTS PER UNIT PRODUCT
Warehouse	Inbound	Outbound
Atlanta	$             12.00	$  13.00
Boston	$             11.50	$  13.00
Chicago	$             11.00	$  13.00
Dallas	$               9.00	$  13.00
Los Angels	$               7.00	$  13.00
Table 3: Outbound Transportation Costs per Unit in Single Centralized System
Warehouse	atlanta	boston	chicago	dallas	los angles
Atlanta	$                     13.00
Boston	$                     16.00	$       13.00
Chicago	$                     16.00	$       10.00	$       13.00
Dallas	$                     17.00	$       17.00	$       17.00	$       13.00
Los Angels	$                     19.00	$       19.00	$       18.00	$       10.00	$       13.00

Table 4: Ordering Cost and Holding Costs (per unit per week)
	cost at	ordering cost	holding cost
current system	regional warehouse	$  5,550.00	$         1.25
central warehouse	central warehouse	$  5,550.00	$         1.25
mixed model	central warehouse	$  3,000.00	$         1.00
	fegional wareshoue	$  3,000.00	$         1.25

HISTORICAL demand for 12 weeks
Week	1	2	3	4	5	6	7	8	9	10	11	12
Atlanta	33	45	37	38	55	30	18	58	47	37	23	55
Boston	26	35	41	40	46	48	55	18	62	44	30	45
Chicago	44	34	22	55	48	72	62	28	27	95	35	45
Dallas	27	42	35	40	51	64	70	65	55	43	38	47
Los Angels	32	43	54	40	46	74	40	35	45	38	48	56

Answer 1

Answer - There is limited information shared in the question. I have assumed ordering cost & Holding cost as it was not clearly spelled out.

There is a huge gap between ordering cost and holding cost so the value of Q looks in appropriate. I have tried to illustrate the concept with formula so that you may recheck the value of ordering cost & holding cost to update the solution at your end.

The solution is explianed in below table and inputs are also taken from above two tables

Pl note thatr Z for 90% is 1.28