Retailers Warehouse (RW) is an independent supplier of household items to department stores. RW
attempts to stock enough items for a 98 percent service probability.
A stainless steel knife set is one item it stocks. Demand (2,400 sets per year) is relatively stable over
the entire year. Whenever new stock is ordered, a buyer must assure that numbers
are correct for stock on hand and then phone in a new order. The total cost involved to place an order
is about $5. RW figures that holding inventory in stock and paying for interest on
borrowed capital, insurance, and so on, add up to about $4 holding cost per unit per year.
Analysis of the past data shows that the standard deviation of demand from retailers is about four
units per day for a 365-day year. Lead time to get the order is seven days.
a. What is the economic order quantity?
b. what is the reorder point?
Solution:
We have D = 2400, S = 5, H = 4
a) EOQ = √2 DS/H
= √2 (2400)5/4
= 77.46 ~ 77 sets
b) σL = √Lσ²L = √LσL = √Lσ²²
= √7(4) 2
= 10.583 sets
From Standard normal distribution, z = 2.05
R = d L + z σL = √Lσ²L
= (2400/365) (7) + (2.05)10.583
= 46.03 + 21.70
=67.73 68 sets
When the inventory level reaches, there are 77 order sets.
attempts to stock enough items for a 98 percent service probability.
A stainless steel knife set is one item it stocks. Demand (2,400 sets per year) is relatively stable over
the entire year. Whenever new stock is ordered, a buyer must assure that numbers
are correct for stock on hand and then phone in a new order. The total cost involved to place an order
is about $5. RW figures that holding inventory in stock and paying for interest on
borrowed capital, insurance, and so on, add up to about $4 holding cost per unit per year.
Analysis of the past data shows that the standard deviation of demand from retailers is about four
units per day for a 365-day year. Lead time to get the order is seven days.
a. What is the economic order quantity?
b. what is the reorder point?
Solution:
We have D = 2400, S = 5, H = 4
a) EOQ = √2 DS/H
= √2 (2400)5/4
= 77.46 ~ 77 sets
b) σL = √Lσ²L = √LσL = √Lσ²²
= √7(4) 2
= 10.583 sets
From Standard normal distribution, z = 2.05
R = d L + z σL = √Lσ²L
= (2400/365) (7) + (2.05)10.583
= 46.03 + 21.70
=67.73 68 sets
When the inventory level reaches, there are 77 order sets.
