Question

In: Operations Management

XYZ hotel uses approximately 200 towels daily. It operates 250 days a year. Assuming, lead time...

XYZ hotel uses approximately 200 towels daily. It operates 250 days a year. Assuming, lead time is normally distributed with a mean of 2 days and a standard deviation of 0.5 day. The management desires 90 percent service level. Annual carrying costs is $0.8 per towel, and ordering costs is $20. Given the production rate for the towel = 600 towels per day.

Determine the optimal order quantity?
Determine Safety Stock?
The sales people have recently told the top management that they could expect $200 improvement in profit if the service level were increased to 99%. Is it worthwhile for XYZ hotel to make this change?

Expert Solution

Solution:

Given,

D = 50000 Towels

S = $20

H = $0.8

L = 2 days

= 0.5 days

Hence,

a: EOQ

b: Safety Stock:

Z = 1.64 for 90% service level.

c: New service level

If we increase the service level to 99% the new Z will be,

Z = 2.58

Hence, new safety stick will be,

There will be no significant change in the total costs associated and hence this new service level is desired to ensure lower changes in stockouts and meeting more demand.

keosha answered 2 years ago

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