Question 3: In a simulation that we ran in class, we considered an inventory sys

Question

Question 3:

In a simulation that we ran in class, we considered an inventory system in which, at the beginning of each day demand occurs, and at the end of the day the retailer places an order with his supplier who satisfies the order overnight. Daily demand follows a normal distribution with mean 10 and a standard deviation of 2. The cost of holding a unit in inventory is $0.5 per unit per day (this cost is only incurred by the units that are left in inventory at the end of the day). The cost of having a backlog is $1 per unit per day. Consider an ordering policy that to orders Q units minus the end-of-day inventory level, such that at the beginning of every day, we start with Q units in inventory. This policy is called an order-upto policy with an order-up-to level of Q.

a) (7 points) Does this system fit into the EOQ or the newsvendor models? Explain.

b) (6 points) without using simulation, find the optimal order-up-to level.

c) (6 points) with the help of a simulation, determine the expected cost per day of the policy proposed in b)?

d) (6 points) Repeat b) and c) assuming now that the holding cost is $2 per unit per day. The backlog cost remains $1 per unit per day.

Explanation / Answer

a. No the system discussed and talked about is a Just in Time system (JIT). There are basic differences because of which such JIT system cannot work or fits EOQ model.

1. EOQ mainly aims at maintaining the inventory level at a desired level of required inventory at a minimal cost while Just-in-Time (JIT) is a management philosophy aiming at providing customers with the right kind and amount of stocks at the right time.

2.EOQ maintains a fixed amount of material in its inventory and has a reorder level while JIT focuses on meeting customers’ demands on time with the right quality and quantity with minimum resource, time, and material wastes.

3.Both are intended to reduce costs and increase the company’s profitability. While EOQ is dependent on financial and marketing strategy, JIT is dependent on the work ethics and commitment of the entire workforce of the company.

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