Petromax Enterprises uses a continuous review inventory control system for one o

Question

Petromax Enterprises uses a continuous review inventory control system for one of Its SKUs. The following information is available on the item. The firm operates 50 weeks in a year.

Demand = 50.000 units/year
Ordering cost = $35/order
Holding cost = $2/unit/year
Average lead time 3 weeks
Standard deviation of weekly demand = 125 units
a. What is the economic order quantity for this item?
b. If Perromax wants to provide a 90 percent cycle- service level, what should be the safety stock and the reorder point?

Explanation / Answer

a.1,323

b.Demand/Weeks per Year = 1000

Standard deviation of weekly demand is given: 125

Lead Time is given: 3 Weeks

Using the Normal Distribution Table, looking up the desired service level of 0.90,

the "Z-Value" is 1.28

So 125 x 3 = 225

225 + 3,000 = 3,22522.

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