X Camera stocks two items in its warehouse which it purchases from an outside su
ID: 2479603 • Letter: X
Question
X Camera stocks two items in its warehouse which it purchases from an outside supplier. Demand for the two items are independent; the inventory carrying percentage is 20% and for each item, the demand during lead time is a normal random variable with mean = 100 and standard deviation = 20. Since customers are willing to wait for the camera when he is out of stock, the shortage penalty is low. The relevant data for each item are the same and shown below.
Expected yearly demand 2400
Cost of item $750
Order cost, K $10
Unit shortage cost $5
(a) Suppose for each item X orders 50 units whenever its reorder point is reached. Given these order quantities for each item, find for each item it’s appropriate reorder point, safety stock and expected annual shortage cost.
(b) Suppose that any customer who wants item 1 and finds it to be out of stock will purchase item 2 and vice versa. Would you change the order quantities and reorder point policies in part (a)? If so, how and what are the safety stock and expected annual shortage cost.
Explanation / Answer
Inventory carrying % is 20% for each item.
The demand during the lead time is a normal random variable with a mean of 100 and standard deviation of 20.
Expected yearly Demand = 2400
Cost of item = $750
Ordering cost =$10
Unit shortage cost =$5
Economic Order Quantity = 2*annual demand*cost per order/cost per unit * carrying cost
So EOQ = 2*2400*10/750*.2= 17.88 or 18 units
Number of orders per year = 2400/18 =133.33 or 133 (rounded off)
Safety Stock is the minimum level of inventory that is held as a protection against shortages due to fluctuations in demand.
The formula for safety stock is:
(Maximum Daily usage*Maximum lead time in days)-(Average daily usage*Average lead time in days)
Lead time demand =Lead time *Average daily usage
Reorder Point = Lead time demand + Safety stock
Since lead time is not given it is difficult to solve the answer
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