2. Reorder Point Calculation (30 points) A distributor of large appliances needs

Question

2. Reorder Point Calculation (30 points) A distributor of large appliances needs to determine the order quantities and reorder points for the various products it carries. The following data refer to a specific refrigerator in its product line: Cost to place an order Holding cost Cost of refrigerator Annual demand Standard deviation during lead time 10 refrigerators Lead time $100 20 percent of product cost per vear $500 eaclh 500 refrigerators 7 davs Consider an even daily demand and a 365-day year a) What is the economic order quantity? b) If the distributor wants a 97 percent service probability, what reorder point, R, should be used?

Explanation / Answer

Annual demand, D = 500

Average demand during lead time, d = (500/365)*7 = 9.6

Std dev of demand during lead time, s = 10

a) Economic order quantity = (2*500*100/(500*0.2)) = 32

b) z-value for 97 percent service probability = NORMSINV(0.97) = 1.88

Reorder point, R = d + z*s = 9.6 + 1.88*10 = 28.4

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