Question

Your firm uses a periodic review system for all SKUs​ classified, using ABC​ analysis, as B or C items.​ Further, it uses a continuous review system for all SKUs classified as A items. The demand for a specific​ SKU, currently classified as an A​ item, has been dropping. You have been asked to evaluate the impact of moving the item from continuous review to periodic review. Assume your firm operates 52 weeks per​ year; the​ item's current characteristics​ are:

Demand ​(D) = 13,520 ​units/year

Ordering cost ​(S) =​$125.00​/order

Holding cost (H) = ​$3.50 unit/year

Lead time ​(L) = 7 weeks

Cycle-service level = 99​%

Demand is normally​ distributed, with a standard deviation of weekly demand of 77 units.

a. Calculate the​ item's EOQ.

EOQ= ____ units. ​(Enter your response rounded to the nearest whole​ number.)

b. Use the EOQ to define the parameters of an appropriate continuous review and periodic review system for this item. Refer to the standard normal table when necessary.

Under a continuous review​ system, order ??? units whenever the inventory level drops to ??? units. ​(Enter your responses rounded to the nearest whole​ number.)

Under a periodic review​ system, order up to ??? units every ??? weeks. (Enter your responses rounded to the nearest whole number.)

c. Which system requires more safety stock and by how much?

The ___ review system requires ____ more units of safety stock than the ____ system.

Answer 1

ANSWER :

Continuous inventory focus on tracking the quantities constantly as as soon as it reaches the reorder point, economic order quantity is ordered.

Periodic review system also called fixed interval reorder system has four original economic order quantity assumptions: -

• There are no restrictions on lot size.
• ordering cost and carrying cost
• demand should be independent
• The lead time is constant.

given data

n = 52 weeks

D = 13520

S = 125

H = $ 3.50

L = 7 WEEKS

service level = 99%

sigma(d) = 77 units

Z - value ( 0.99 ) = 2.33

here we get z value by table

now

d = D/n

=(13520/52)

= 260 units / week

( A)

EOQ = (SQURE ROOT ( 2DS / H ) )

= (SQURE ROOT ( 2*13520 * 125 ) / 3.50 )

= SQURE ROOT ( 3380000 / 3.50 )

= SQURE ROOT ( 965714.28 )

= 982 .70

(B)

CONTINUOUS REVIEW :

ROP = ( d * LT ) + ( Z √ ( LT ) ( SIGMA d ) )

= ( 260 * 7 ) +( 2.33 √ (7 ) (  77 ) )

= ( 1820 ) + ( 2.33 * 2.64 * 77)

= 1820 + 473.64

= 2293 .64

  

under continuous review system order 982.70 units whenever the inventory level drops to 2293.64

PERIODIC REVIEW :

p = Q / d

= 982.70 / 260

= 3.77 or approximately = 4

T = d ( p + LT ) + ( z  √ ( p + LT ) ( sigma d ) )

= 260 ( 4 + 7 ) + ( 2.33 √  ( 4 + 7 ) ( 77 ) )

= 260 ( 11 ) + ( 2.33 *

= 2860 + 593.84

= 3453.84

under a periodic review system , order upto 3453.84 units

every 4 weeks

(C)

safty stock ( continuous ) = ( z √ (LT) (  sigma d ) )

= ( 2.33 √ ( 7 ) (  77) )

= ( 2.33 * 2.64 * 77 )

= 473 .64 units

safty ( periodic ) = Z √ ( P + LT ) * sigma d

= 2.33 √ ( 4+7 ) * 77

= 593 .84

difference = (593.84 - 473.64 )

= 120 . 2

the periodic review requires 120 units more unitts of safty stock than the continuous review system

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