It is your responsibility as the new head of automotive section of Nichols Depar

Question

It is your responsibility as the new head of automotive section of Nichols Department Store, to ensure that reorder quantities for the various items have been correctly established. You decide to test one item and choose Michelin Tires. The parameters for the inventory system is as follows: Cost per tire Holding cost Demand Ordering cost Lead time Standard deviation for demand in the6 lead time $35 each 20% of product cost per year 1,000 per year $20 per order 4 days Assume demand occurs 365 days per year. Because customers generally do not wait for tires but go elsewhere, you decide on a service level of 98% (a) What is the economic order quantity (EOQ)? (b) What is the reorder point?

Explanation / Answer

A.

EOQ = (2*Annual demand*ordering cost/annual holding cost per unit)^.5

EOQ = (2*1000*20/(.2*35))^.5

EOQ = 75.59 or 76 units of tires

B.

ROP = daily demand * Lead time + Z*SD*(Lead Time)^.5

SD = standard deviation = 6 units of tires

Value of Z at 98% service level = 2.06 (as per the normal distribution table)

Daily demand = 1000/365 = 2.74

ROP = daily demand * Lead time + Z*SD*(Lead Time)^.5

ROP = 2.74*4 + 2.06*6*(4)^.5

ROP = 35.68 or 36 units of tires

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