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Inventory Practice

The Discount Carpet Store is open 360 days per year and sells 11,000 square yards of
Super Shag carpet annually. Demand for Super Shag carpet is constant during the year.
The annual carrying cost for Super Shag carpet is $0.75 per square yard and the ordering
cost is $150. Based on an EOQ analysis the Discount Carpet store has determined that
the relevant costs will be minimized if 2,100 square yards of Super Shag Carpet are
ordered each time an order is placed. The lead time for orders is 7 days.

QOPT = 2100
L=7

Fixed Quantity System


Suppose in the previous problem that daily demand for Super Shag carpet is randomly
distributed according to a normal distribution with mean 30 square yards and standard
deviation of 7 square yards. What formula would you enter into Excel to find the reorder
point that should be used for a 95% customer service level? What will be the safety stock
if the reorder point is 240?

𝜇 L = 𝜇 t x L  (30)(7) = 210
𝜎L = 𝜎t x √L  (7)(5) = 18.5

ROP = Norm.Inv(.95, 210, 18.5) = 240


SS = 240 -210 = 30

Fixed Periodic System


Suppose in the previous problem that daily demand for Super Shag carpet is randomly
distributed according to a normal distribution with mean 30 square yards and standard
deviation of 7 square yards. What review period should be used to minimize
setup/ordering costs and cycle stock holding costs? What formula would you put into
Excel to find the target inventory level that should be used for a 95% customer service
level if the review period is 70 days? What will be the safety stock if the target inventory
level is 2200?

T = QOPT / 𝜇 t  (2100)/(30) = 70
𝜇 THL = 𝜇 t (T+L)  (30)(70+7) = 2310
𝜎THL = 𝜎t √(T+L)  (7)( √77) = 61
M = Norm.Inv(.95, 2310, 61)
SS = 2200 – 2310 = -110
Inventory Practice

The Discount Carpet Store is open 360 days per year and sells 11,000 square yards of
Super Shag carpet annually. Demand for Super Shag carpet is constant during the year.
The annual carrying cost for Super Shag carpet is $0.75 per square yard and the ordering
cost is $150. Based on an EOQ analysis the Discount Carpet store has determined that
the relevant costs will be minimized if 2,100 square yards of Super Shag Carpet are
ordered each time an order is placed. The lead time for orders is 7 days.

Fixed Quantity System


Suppose in the previous problem that daily demand for Super Shag carpet is randomly
distributed according to a normal distribution with mean 30 square yards and standard
deviation of 7 square yards. What formula would you enter into Excel to find the reorder
point that should be used for a 95% customer service level? What will be the safety stock
if the reorder point is 240?

R = norminv(0.95, 210, 18.5)

SS = 240 – 210 = 30

Fixed Periodic System


Suppose in the previous problem that daily demand for Super Shag carpet is randomly
distributed according to a normal distribution with mean 30 square yards and standard
deviation of 7 square yards. What review period should be used to minimize
setup/ordering costs and cycle stock holding costs? What formula would you put into
Excel to find the target inventory level that should be used for a 95% customer service
level if the review period is 70 days? What will be the safety stock if the target inventory
level is 2410?

T = 360 / (11,000 / 2,100) = 69 days

M = norminv(0.95, 2310, 61.4)

SS= 2410 - 2310 = 100


Inventory Practice

The J&B Card Shop sells calendars which it purchases once each year. Demand for
calendars follows approximately a normal distribution with mean 2500 and standard
deviation 200. The calendars cost $2.50 each and J&B sells them for $8. At the end of the
selling season J&B can sell any surplus calendars for $2. What formula would you put
into Excel to find the optimal number of calendars to order to minimize the expected
salvage and shortage costs?

Solution:
cs=2.5-2=0.5
cu=8-2.5=5.5
5.5/(5.5+0.5)=0.92
=norminv(0.92, 2500, 200)