Inventory Control Problem Johnson Corporation has the following information abou

Question

Inventory Control Problem Johnson Corporation has the following information about a product (SKU) that it carries in stock: Average demand = 40 units per day The business year has 300 days Order lead time = 15 days Item cost = $50 per unit Ordering cost = $ 30 per order (regardless of the order size) Inventory annual carrying cost = 20% Standard deviation for demand during lead time = 100 units Desired cycle service level = 97.5% Using continuous review inventory policy (Q system).

Suppose the company uses a two-bin system to carry the inventory for this item. How much inventory should they vary in the secondary bin? How much should they carry in the first bin?

How much transportation inventory do they carry year-around?

How much total inventory do they carry for this item? What is the annual inventory keeping cost for this item?

Explanation / Answer

Quantity to be carried in secondary bin = Reorder point (ROP = 796)

ROP = µD*L + ss , where ss is the safety stock

in the first bin they should carry the quantity equal to order lot, i.e. EOQ = 268

.

Transportation Inventory = EOQ = 268

Total Inventory they carry = 796 + 268 = 1064

Anual inventory keeping post = 1064/2*10 = 5320

Daily Demand µD = 40 Standard Deviation of Daily Demand D = 25.820 Working Days per year Y = 300 Annual Demand D = Y*µD 12000 Lead Time (Days) L = 15 Service level SL = 97.50% Z-value corresponding to Service Level Z = 1.96 Safety stock ss = Z*D*(L 196.00 Reorder Point ROP = µD*L + ss 796.00

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