Order cost=70 Unit cost=25 Holding cost =, 2 x 25 =5 Part C- Uncertain Demand RC

Question

Order cost=70
Unit cost=25
Holding cost =, 2 x 25 =5

Part C- Uncertain Demand RC:70 (HC>,2x 25 After one year of operations, the Nawras Electronics Company reached agreement with suppliers to ensure a constant lead time of 7 days. However, the company also realized that daily demand for laptops exhibited some variability, with the mean annual demand still at 3200 units, but with a standard deviation of 150 laptops. 6d 21. The company has decided on a service level of 95%. Accordingly, what size of safety stock should be kept to cope with uncertainty? policy type I service level is not enough information encompassing. What is meant by this? 22, Determine the total annual inventory cost under this 95% service level inventory 23. In a first asse ssment of the new policy, the company managers concluded that the 24. Calculate the fill rate for a reorder level of 725 screens? 25. What is he expected umbsrc o unis short per oyele? 26. The Nawras Electronics Company is planning to switch to a periodic review system whose replenishment period is based on the same time parameters as the existing continuous review system. Analyze the prospective inventory system and help the company decide whether or not to shift to a periodic review system.

Explanation / Answer

Given Data:

Order cost (S)= 70

Unit Cost = 25

Holding cost(H) = 5

Solution:

21) Annual Demand (D) = 3200 Units with a standard deviation of 150 Units.

Lead time = 7 Days = 7/365 = 0.0191 Year { For calculations, the demand data and the lead time data should be in same units)

So, Standard Deviation of demand during lead time = Standard deviation of demand * Sqrt( Lead Time) = 150*Sqrt(0.0191) = 20.77 ~ 21

Now Using the Normal distribution table, For a 95% service level , The Z value is = 1.65

Therefore, the safety stock (SS) = Z* Standard deviation of demand during lead time = 1.65*21 = 34.65 ~ 35 Units

22) In order to calculate the total annual inventory cost, firstly, we have to calculate the optimal Lot size of ordering.

So, Optimal Lot size (Q)= EOQ = Sqrt ( 2*D*S/H) = Sqrt (( 2*3200*70)/5) = 299.33 ~299 Units.

Now,

Annual Inventory cost = Annual Ordering cost + Annual Cycle Inventory Holding Cost + Safety Stock Holding cost = (D/Q)*S + (Q/2)*H + SS*H = ((3200/299)*70)+ (( 299/2)*5)+(35*5) = 1671.66 ~ 1672

23) Type 1 service level is not enough information encomapssing means that the service level chosen or the inventory policy applicable doesn't takes into account all the demand and supply parameters to come to a concluding policy statement. For example, the decision to maintain a certain service level will depend and will affect several other parameters of a supply chain which are not taken care of in the type 1 service level. ( Please note that more specific answer could be phrased around the same lines, if the context around the type 1 service level could be shared in the question)

24) Fill rate for ROP = 725 Units:

In this case, Safety Inventory(SS1 )= ROP- Average Demand during lead time = 725 - (3200*0.0191) = 664 Units.

Lot size Q = EOQ = 299 Units

Std Deviation of Demand during lead time (SD) = 21

As the safety inventory in this case is more than the demand during the lead time, The estimated shortage per replenishment cycle will be 0.

Therefore, Fill rate = 1- Estimated shortage/Lot size = 1 ~ 100%

This could also be verified by using the formula - Estimated shortage = -Safety Inventory * (( 1- NORMDIST((Safety Inventory/Standard Deviation of demand),0,1,1)) + Standard Deviation of demand * NORMDIST ((Safety Inventory/Standard Deviation of demand),0,1,0) which will give negative value.

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