A large Internet Retail Distributor uses 24000 boxes each month to pack and ship

Question

A large Internet Retail Distributor uses 24000 boxes each month to pack and ship its goods. The boxes cost $1.20 each. The company estimates the annual holding cost for a box at 30% of the box cost. The purchasing department of the company estimates that the cost to place an order is $15.

The Internet Retail distributor from decided to use the ROP system for determining when to place an order. The purchasing manager has determined that the monthly demand for crates of 24000 has a standard deviation of 2500. The current supplier of the boxes has a 0.5 month lead time. 1. If the manager wants a 90% customer service level on the crates, what should the ROP be for this item? 2. What would the reorder point be for the paper? 3. If the manager were to switch to a 95% customer service level how much more safety stock would be needed?

Explanation / Answer

Monthly demand, d = 24000

Std deviation of monthly demand, = 2500

Lead time, L = 0.5 months

1) For 90% service level, value of z = NORMSINV(0.9) = 1.28

Reorder point = d*L + zL = 24000*0.5 + 1.28*25000.5 = 14263 crates

2) Safety stock = zL = 1.28*25000.5 = 2263 crates

3) For 95% service level, z = NORMSINV(0.95) = 1.645

Safety stock = zL = 1.645*25000.5 = 2908 crates

More safety stock to be carried = 2908 - 2263 = 645 crates

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