A firm that makes assembles electronic circuits has an average demand of 100,000
ID: 356679 • Letter: A
Question
A firm that makes assembles electronic circuits has an average demand of 100,000 units per year with a standard deviation of 2,000 units. (The demand is stochastic). Each time an order is placed, a setup cost of $100 is incurred. Holding cost per item is $2 per unit per year. The lead time for the electronic circuits is 5 days. (Assume that the firm works for 250 days per year). The demand for the product is assumed to be normal and the firm wants to reach the 99.5% service level by keeping enough safety inventory. (To get 99.5% service level, Z? should be 2.576). a) What is the economic order quantity? b) What is the required safety stock? c) What is the reorder point?
Explanation / Answer
Given are the following data :
Annual demand = D = 100,000 units
Set up cost = Cs =$100
Holding cost per unit per year =Ch = $ 2
Economic Order Quantity ( EOQ ) = Square root ( 2 x Cs x D /Ch ) = Square root ( 2 x 100 x 100,000 / 2 ) =10,000
ECONOMIC ORDER QUANTITY = 10,000 UNITS
Z value corresponding to 99.5% service level =2.576
Standard deviation of yearly demand ( 250 days ) = 2,000units
Lead time = 5 days
Therefore, standard deviation of demand during lead time = 2000 x Square root ( 5/250) = 2000 x 0.1414 = 282.8
Safety stock = Z value x Standard deviation of demand during lead time
= 2.576 x 282.8
= 728.49 ( 729 rounding to next higher whole number )
REQUIRED SAFETY STOCK = 729 UNITS
Reorder point
= Daily demand x Lead time ( days) = safety stock
= 100,000/250x5 + 729
= 20,000 + 729
= 20729
REORDER POINT = 20729 UNITS
ECONOMIC ORDER QUANTITY = 10,000 UNITS
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.