Question

A community hospital in Southeast Ohio consumes 1,000 boxes of bandages per week. The price of bandages is $35 per box, and the hospital operates 52 weeks per year. The ordering cost is $15, and the cost of holding one box is 15% of the price of the material. The lead time to receive materials is 2 weeks.

f) If the hospital uses a periodic review system, with the review period (P) equal to 2 weeks and cycle-service level of 97%:

i. What would be the target inventory level, T? (Use the original information from part e)

ii. What is the cost of using the periodic review system? iii. Compare/Contrast the continuous review system and periodic review system in terms of safety stock and costs. What are the managerial implications of each?

Answer 1

I have taken the screen shot to attach since the functions are not getting copied from excel.

iii)The continuous review system requires knowing physical inventory all the times, like using a barcode scanner every time cashier scans product purchased by the customer to update inventory. This method is more expensive to administer because inventory needs to update each time something goes out of shelf or comes into the shelf. It requires a lower level of safety since there is only uncertainty during the delivery period is the magnitude of demand. Therefore, during that time, the only safety stock required is for potential stock outs.

The advantage of the continuous review system:

• Provide real-time updates of inventory counts
• Make easier to know when to order
• Provide accurate accounting

The disadvantage of the continuous system:

• Involves additional cost

The periodic review system, evaluate inventory at specific times like counting inventory at the end of each month. It is inexpensive to administer since counting takes place at a particular time, but a higher level of safety is required to buffer against uncertainty in demand over longer planning horizon.

The advantage of the periodic review system:

• Reduce time for business owner to analyze inventory counts
• Allows the business owner having more time to run another aspect of the business
• Simple to administer
• Save labor cost for counting

The disadvantage of the periodic review system:

• It may not provide an accurate inventory count when there is a high volume of sale
• It may also make accounting inaccurate
• There is little control over inventory movement