Question

Wooden Stuff is a furniture retailer operating in Cambridge, Boston. It mainly commercializes wooden desks in various sizes and shapes, and they have become very popular among MIT and Harvard students that need to furnish their rental apartments. To date, they have been managing their inventory with a simple Base Stock Policy: one item sold, one item ordered. This has worked well for a few years, but now they would like to switch to a more sophisticated policy. Their flagship product is SKU 6197OT, the Lifting Table, a table that can be adjusted to different heights to allow working in seated or standing position. This product accounts for one third of their sales and they would like to ensure a Cycle Service Level of 95% for this item. You have been asked to analyze this item and propose an inventory management policy that fits the company’s needs. After doing a little bit of research, you have estimated that the annual holding charge for the Lifting Table is 25%. The demand planner has given you some interesting data: the demand for the Lifting Table follows a normal distribution with a mean of 1762 units per year and a standard deviation of 211 units. The purchasing department informs you that the cost of each desk is $120 and the estimated ordering costs are $100 per order. It usually takes 10 days for the ordered items to arrive to the Wooden Stuff facilities. Every Lifting Table is sold at a price of $300. (Assume that there are 365 days in one year, and 30 days in a month.) After analyzing all the available information and interviewing some key stakeholders in the company, you have decided to explore a Continuous Review Policy (s, Q).

1. What would be the replenishment order quantity Q?

2. What would be the reorder point s?

3. If this policy was to be implemented, what would be the Item Fill Rate?

Answer 1

1. The Replenishment order quantity Q is 119 units.

Explanation:

Replenishment order quantity Q:

Z value for service level 0.95 = 1.64485 or 1.65

The z value is derived from the z value table or online z value calculator.

Safety stock (SS) = 1,101 units

2. The reorder point s is 1,149 units.

Explanation:

The reorder point s:

3. If this policy was to be implemented, then the Item fill rate would be 65%.

Explanation:

Item Fill rate is defined as the measurement of company's stock against customer orders. Fill rate does not consider stock-out or back-orders, because they may bring negative fill rates for items.

Item fill rate = Goods purchased by the the company / units ordered by the customers.

However, in the given question the formula for item fill rate = Reorder point / D

This is because annual demand (D) depicts the unit ordered by customers and the reorder point is the minimum amount of stock that the company should purchase to avoid stock-outs.

Item fill rate = 1149 / 1762

= 0.652 or 65%.