Joey-Ray\'s fabric store has forecasted they will have a demand for 2,000 spools

Question

Joey-Ray's fabric store has forecasted they will have a demand for 2,000 spools of their bobbin thread Each spool costs they S1.00 from their distributor and costs about 50% of the items cost to carry it in inventory. Each time they call in a replenishment they are charged an order fee of $5 and it takes 23 days to arrive. Joey-Ray's stays open 259 days per year. 1. What is the EOQ for the bobbin? 2. What is the ROP for this product? 3. What is the cycle time for an order? What is the TAC for this product? If a product has an average demand of ten units with a standard deviation of 5, holding 10 units of this product will give us a CSL of what? If we want to maintain a customer service level of 85% for a product that has a mean demand during lead time to 50 and a standard deviation of 10, what would our ROP need to be? How much safety stock are we holding for this product?

Explanation / Answer

Annual demand, D = 2000

Inventory holding cost per unit per year, H = 1*50% = $ 0.5

Ordering cost, K = $ 5

1) Economic Order Quantity (EOQ) = (2*D*K/H) = (2*2000*5/0.5) = 200

2) Re-Order Point (ROP) = Average demand during lead time

= (Annual demand / days per year ) * Lead time

= (2000/259)*23

= 178

3) Cycle time for order = (Q/D)*259 = (200/2000)*259 = 26 days

4) TAC = (D/Q)*K + (Q/2)*H + D*P

= (2000/200)*5 + (200/2)*0.5 + 2000*1

= $ 2100

5) Given safety stock, ss = 10

We know for variable demand that, ss = z*L

so, z = ss/(L) = 10 / (5*23) = 0.417

Corresponding service level = NORMSDIST(0.417) = 66.2%

____________

z value for 85% csl = NORMSINV(0.85) = 1.04

ROP = 50 + 1.04*10 = 60.4

Safety stock = 1.04*10 = 10.4

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