Wooden Stuff is a furniture retailer operating in Cambridge, Boston. It mainly c

Question

Wooden Stuff is a furniture retailer operating in Cambridge, Boston. It mainly commercializes wooden desks in various sizes and shapes, and they have become very popular among MIT and Harvard students that need to furnish their rental apartments. To date, they have been managing their inventory with a simple Base Stock Policy: one item sold, one item ordered. This has worked well for a few years, but now they would like to switch to a more sophisticated policy.

Their flagship product is SKU 3501ZJ, the Lifting Table, a table that can be adjusted to different heights to allow working in seated or standing position. This product accounts for one third of their sales and they would like to ensure a Cycle Service Level of 95% for this item.

You have been asked to analyze this item and propose an inventory management policy that fits the company’s needs. After doing a little bit of research, you have estimated that the annual holding charge for the Lifting Table is 25%. The demand planner has given you some interesting data: the demand for the Lifting Table follows a normal distribution with a mean of 2404 units per year and a standard deviation of 291 units.

The purchasing department informs you that the cost of each desk is $120 and the estimated ordering costs are $100 per order. It usually takes 10 days for the ordered items to arrive to the Wooden Stuff facilities. Every Lifting Table is sold at a price of $300. (Assume that there are 365 days in one year, and 30 days in a month.)

After analyzing all the available information and interviewing some key stakeholders in the company, you have decided to explore a Continuous Review Policy (s, Q).

What would be the replenishment order quantity EOQ?

Round to the nearest integer.

What would be the reorder point s?

Round to the nearest integer.

Explanation / Answer

1. Economic order quantity = sqrt ( 2*S*D / H)

where S = Ordering cost per order

D = Mean Annual demand

H = Annual holding charge per year per unit

Here, S = 100, D = 2404 and H = 25% or 0.25

Hence EOQ = sqrt (2*100*2404 / 0.25) = 1386 units

2. Reorder point = d*L + Z*SD*sqrt(L)

where d = Average daily demand

L = Lead time

Z = number of standard deviations corresponding to service level probability

SD = Standard deviation of daily demand

Here d = 2404 / 30*365 = 0.2195 units

L = 10 days

SD = 291 units

Z = 1.96 for 95% cycle service level

So reorder point = (0.2195*10)+ (1.96*291*sqrt(10))

= 2.195 + 1803.637

= 1805.8 or 1805 units

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