Suppose that an auto part in a manufacturer’s inventory has the following charac
ID: 420854 • Letter: S
Question
Suppose that an auto part in a manufacturer’s inventory has the following characteristics:
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Forecast of demand = 1,250 casesper week
Forecast error, std. dev. =475 cases per week
Lead time = 2.5 weeks
Carrying cost =30 % per year
Purchase price, delivered = $56 per case
Replenishment order cost =$40 per order
Stockout cost =$10 per case
Probability of being in stock during the lead time =80%
Assume the manufacturer uses ROP method to control the inventory of this item. What’s the total annual costs excluding purchasing costs??? show work
Explanation / Answer
In ROP method
EOQ = [ 2x1250 x52x40 / 56x0.3]1/2 = 556
No. of orders = 52 x1250 /556 = 117
Re order point = Demand during lead time + safety stock
= Avg demand per week x lead time in weeks + z x SD of demand during lead time
= 1250 x 2.5 + z x 475 ( lead time)1/2
= 1250 x2.5 + 0.84 x475 ( 2.50)1/2
= 3125 + 630.87 = 3755.87
Total annual cost = Q/2 xHolding cost + No. of orders x ordering cost + Holding cost x safety stock
= 556/2 X16.8 + 117 x40 +16.8 x 631
= 4670.4+4680 + 10600.8 = 19951
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