Question

In: Operations Management

Demand averages 20,002 units per year and operates 365 days per year. Holding cost= $5 per...

Demand averages 20,002 units per year and operates 365 days per year. Holding cost= $5 per unit per year while the ordering cost is $100 per order. Company is currently using a periodic (P) inventory system, holding 1000 units in safety stock to cover demand uncertainty and placing orders for every 73 days. The company is investigating the possibility of using a continuous review (Q) inventory system with holding 15 units in safety stock to cover demand uncertainty. Use the info to answer the next questions

Suppose a Q system is used with a lot size of 200 (not the EOQ) Assume the safety stock is 15 units.

A)What is the reorder point?

B) Under the company's current P system (from the begging) how much will annual holding costs be? Assume 1000 units in safety stock

C) Annual ordering costs?

D) What is the Target level for this P system?

Expert Solution

Given,

Annual Demand (D) = 20,002 units

Holding cost (H) = $5 per unit per year

Ordering cost (S) = $100 per order

Therefore,

A) Economic order quantity (EOQ) = sqrt(2DS/H)

= sqrt(2*20002*100/5)

= 894.47 units

B) Given, lot size(Q) = 200

Safety stock (ss) = 15 units

Hence, Annual holding cost = (Q/2 + ss) * H

= (200/2 + 15)*$5

= $575

C) Annual Ordering cost = (D/Q*) S

= (20002/200)*$100

= $10,001

D) Time would between orders = 365/number of orders in a year

= 365/(D/Q)

= 365/(20002/200)

= 3.649

Hence, Time between two orders = 4 days

keosha answered 2 months ago

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