22 points) Erin Manufacturing places orders for cylinders every week. Demand for
ID: 380854 • Letter: 2
Question
22 points) Erin Manufacturing places orders for cylinders every week. Demand for the cylinders is normally distributed with a mean of 50 units per day and a standard deviation of 10 units per day. The cylinders take 9 workdays to arrive. The company operates 350 days per year. Erin strives to provide a 996% cycle service level. It costs the company year, and it costs $100 in ordering costs every time that an order is placed. $2 to hold one cylinder in inventory for a a. How many units of safety stock should be held? (8 points) b. What should the target inventory level b?(6 pointy) c. Suppose that it is time to order. On-hand inventory 35 units. How many units should be ordered now? (4 points) If Erin Manufacturing decided to implement a continuous review inventory system, how much money per year would the firm save in safety stock holding costs compared to its current system? (5 points) d.Explanation / Answer
Answer to Q.1:
Standard deviation of daily demand of cylinder = 10
Lead time of delivery of cylinder = 9 days
Hence, standard deviation of demand during lead time
= Standard deviation of daily demand x Square root ( Lead time )
= 10 x Square root ( 9)
= 10 x 3
= 30
Required service level = 99.6% ( i.e. in stock probability 0.996 )
Hence, corresponding Z value = NORMSINV ( 0.996) = 2.652
Therefore ,
Safety stock = Z value x Standard deviation of demand during lead time
= 2.652 x 30
= 79.56 ( 80 rounded to nearest whole number )
SAFETY STOCK = 80
Answer to Q,2:
Reorder point
= Mean daily demand x Lead time + Safety stock
= 50 x 9 + 80
= 450 + 80
= 530
Cycle inventory fluctuates between 450 and 0 at steady rate and safety stock remains unchanged.
Thus,
Target inventory level = Average cycle inventory + Safety stock = 450/2 + 80 = 225 + 80= 305
TARGET INVENTORY LEVEL = 305 CYLINDERS
Answer to Q.3 :
Since on hand inventory = 35 cylinders,
Quantity should be ordered = Reorder point = 35 = 530 – 35 = 495
495 CYLINDERS SHOULD BE ORDERED
Answer to Q.4:
Annual demand for cylinders = D = 50 X 350 = 17500 units
Ordering cost = Co = $100
Unit inventory holding cost = Ch = $2
Thus Economic Order Quantity ( EOQ ) as per continuous review inventory system
= Square root ( 2 x Co x D / Ch)
= Square root ( 2 x 100 x 17500 / 2)
= 1322.87 ( 1323 )
Thus EOQ = 1323
There will be no safety stock requirement under continuous review system
Holding cost of safety stock under current periodic review system
= Ch x safety stock
= $2 x 80
= $160
COMPANY WOULD SAVE = $80
SAFETY STOCK = 80
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.