Question

In: Operations Management

Bold Bodybuilders, Inc. is a large sporting goods store. It has become the exclusive distributor of...

Bold Bodybuilders, Inc. is a large sporting goods store. It has become the exclusive distributor of the new bodybuilding equipment called Geni. After carrying the equipment for a year, Joe Sabatini, a manager of the supply chain, decided to analyze the company's inventory policy for Geni. On the basis of the past year's record, Joe has identified the following weekly demand data:

Weekly Demand Occurrence, Week

95 8

96 2

97 6

98 10

99 8

100 6

101 6

102 2

103 4

Total 52

The annual demand for Geni is considered to be 5,128 units, annual holding cost per equipment is $244, and ordering cost is $4,250 per order. The equipment price is $929 per unit. The new order is made when the inventory level in the store drops to a predetermined number of units on hand. Once the company orders Geni from the supplier, it will come to the store in about 3 weeks.

Questions (Please fill in your answer using the enclosed Excel answer template)

  1. Explain what inventory planning and ordering system you are going to use in this case and why.
  2. Identify the optimal order quantity and total annual inventory cost. Explain the insights of your results.
  3. What are the best safety stock and reorder point that guarantees with a probability of 99% that the store will not run out of stock of Geni equipment? Explain the insights of your results.

Solutions

Expert Solution

Answer a:

The type of inventory planning that would be used in this case is ‘economic order quantity’. Economic Order Quantity is a model used to calculate inventory stocking levels. Its main purpose is to help a company maintain a consistent inventory level of inventory and to reduce overall costs of inventory. EOQ uses variable annual usage amount, order cost and warehouse carrying cost.

Answer b:

Optimal order quantity or economic order quantity is given as:

Total annual inventory cost = purchase cost + ordering cost + holding cost

Purchase cost = $929

Ordering cost = $4250

Holding cost = $244

Thus,

Total annual inventory cost = $929 + $4250 + $244 = $5423

Answer c:

Now lead time = 3 weeks

Average weekly demand = (95+96+97+98+99+100+101+102+103)/9 = 99

Service level = 99% = 99/100 = 0.99

Z corresponding to 0.99 in normal distribution table = 2.58

Standard deviation = 4 (as can be seen from the weekly data by comparing each with average weekly demand)

Formula for reorder point is

Thus,

Reorder point = 99 (3) + 2.58 (4) (√3)

Reorder point = 297+17.87 = 314.87

Safety stock = 2.58 (4) (√3) = 17.87

keosha answered 1 year ago
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