Question

The annual demand for admission kits for patients with infectious conditions such as methicillin-resistant staphylococcus aureus (MRSA) and C-diff is 2,200. The purchase price of a kit is $80. The holding cost per unit per year is 20% of the item’s price, and the cost of placing an order is $20. Currently, the kits are ordered by the supply team in quantities of 200 and delivered by the supplier two weeks later. The supply team places orders to their supplier when inventory reaches 100. Demand is uncertain and the standard deviation of weekly demand is 15.





Should the hospital carry any safety stock of admission kits? What level of safety stock do you recommend






. What changes do you propose to the current ordering policy of the supply team? What would be the impact on total annual cost (ordering and holding)

Answer 1

Should the hospital carry any safety stock of admission kits? What level of safety stock do you recommend

Yes, the hospital must carry a safety stock of admission kits because the supplier delivers the quantities in 2 weeks.

The safety stock for the 1 day = Z score * Standard deviation of a day + Average order of a day

= 1.65 * (15 / (7^0.5)) + (2,200 / 365)

= 15.3820179673 Units.

The supplier supplies the delivery in 2 weeks. So, we need to calculate the safety stock for 2 weeks.

The safety stock for 2 weeks = 15.3820179673 * 14

= 215.35 Units or 216 Units approx.

The Z score value is used at a 95% level; which means there is less than a 5% chance that the inventory will not be sufficient to meet the required demand.

Different Z score can be used to different safety levels.

What changes do you propose to the current ordering policy of the supply team? What would be the impact on total annual cost (ordering and holding)

Per order quantity should be changed to 75 Units approx.

The frequency of order should be increased.

If the order quantity is set at the EOQ level then the total cost will be saved.

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