3.10 Suppose you are the director of operations for the southeast region for con

Question

3.10 Suppose you are the director of operations for the southeast region for
consumer electronics retailer BigBuy. You have been asked by the chief
operating officer of the company to review the inventory management processes
and procedures in place at all BigBuy retail outlets in your region.Accordingly, you have gathered some data from the store managers and
regional DC managers.
To begin understanding the stocking processes, you start with a single
stock-keeping unit (SKU) at a single retail outlet, a 19-in. LCD computer
monitor that is sold at BigBuy’s largest store in Raleigh, NC. The
data you have collected indicates the following:
• Average demand for this SKU is about 5 units per day, which equates
to 1800 units per year on BigBuy’s operating schedule of 360 days per
year.
• The DC manager indicates that the DC’s operating policy specifies
next-day fulfillment for all orders placed by retail outlets prior to
6 p.m. on any given day.
• The cost of placing a replenishment order at the retail store is estimated
to be $6.25, which covers various administrative functions
like entering the day’s orders on the Intranet-based ordering system
and receiving daily shipments, sorting them, and stocking them in
the store room.
• BigBuy’s corporate accounting standards specify a 25% inventory
holding cost rate for all retail outlets.
• The cost (to BigBuy—i.e., cost on its accounting books) of this 19-in.
LCD monitor is $100.
• Since this is a relatively fast-moving item at this store, the current
replenishment policy calls for daily (on average) replenishments (i.e.,
an order quantity of 5 units).
a. Is this a good replenishment policy? What is the annual cost of this
replenishment policy?
b. Is the current replenishment policy optimal? If so, why? If not, what
needs to change for daily replenishments to be optimal?

3.11 Continuing the scenario described in Question 3.10 earlier, you decide
to gather additional data to further explore inventory management
processes and procedures at the Raleigh BigBuy store. First, you find
that daily demand is, as one would suspect, not constant. The data you
gather indicates that mean daily demand is 5 monitors, with a standard
deviation of 1.5 monitors, approximately following a normal
distribution.
a. Assuming that the DC is able to consistently meet its “next-day”
policy, what should the reorder point be in a continuous-review
(Q, R) inventory system at the BigBuy store in order to achieve a 90%
cycle service level?
b. Relentless in your pursuit of outstanding performance—driven to
prove that you deserve to be the next COO—you collect additional
data that indicates that the DC is actually not always able to providenext-day fulfillment. The actual performance is an average fulfillment
lead time of 1.2 days, with a standard deviation of 0.4 days,
approximately following a normal distribution.
c. Given this updated information, what reorder point do you
recommend?
d. If BigBuy used the reorder point from (a) above when, in actuality,
lead time follows the distribution specified by the data as described
earlier, what would be the actual in-stock probability performance
(i.e., the cycle service level)?

Above two quesions are connected please answer the 3.11 question.

Explanation / Answer

3.10

Annual demand, D = 1800 units

Ordering cost, S = 6.25

Holding cost, H = 100*25% = 25

(a) Current replenishment policy is not good, because it results in substantially high inventory related cost.

Annual cost of current policy = (D/Q)*S+(Q/2)*H = (1800/5)*6.25+(5/2)*25 = $ 2312.5

(b) Current policy is not optimal, Ordering cost needs to be reduced as per Economic Order Quantity (EOQ) model for daily replenishment policy to be optimal.

EOQ = SQRT(2DS/H) = SQRT(2*1800*S/25) = 5 , Solving it for S, we get,

S = $ 0.174 per order

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