1. Value Electronics has a yearly demand of 100,000 units for their tablet. The

Question

1.

Value Electronics has a yearly demand of 100,000 units for their tablet. The order processing cost per order is $2,000, and inventory holding cost is $100/item/year. They have opted for the reorder point system, and it has two options for transportation: by truck and by rail. Truck transportation takes 1 week, while rail transportation takes 2 weeks of lead time. Truck transportation costs $2 per tablet, while by rail the transportation cost is $1 per tablet. It is the policy of Value Electronics to hold enough inventories to cover demand for twice the lead time.

Calculate the safety stock for the truck scenario.

Explanation / Answer

We need to calculate safety stock for truck scenario, where we have

Yearly demand of 100,000 units and Truck transportation lead time of 1 week

Since Value Electronics has a policy to carry inventories (which is nothing but safety stock in this case) to cover demand for twice the lead time, we need to calculate safety stock covering demand for 2 weeks (twice of truck transportation lead time).

Assuming 52 weeks in a year, Weekly demand for tablets would be,

100,000/ 52 = 1923.07

Hence, safety stock would be,

1923.07 x 2 = 3846 (rounding off)

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