HIKEBIKE

HikeBike is a bike retail company that sells different kinds of bikes and related accessories. They
purchase a famous type of purple electric bike from Purple Bikes company. The
annual demand HikeBike sees for this particular bike is 5000 units and it costs them $200 each.
Their inventory holding charge is 10% per year and it costs about $100 to place an order.

(a)- What is the economic order quantity for the purple electric bikes? Round your answer to the
nearest integer and use that value for the next question.

(b)- What is the total annual cost for this economic order quantity? Round your answer to two decimal
places. If your answer is 1.236, enter 1.24.

SOLUTION:

D = 5,000 per year

I = 0.1 per year

C = $200

S = $100 per order

(a)- EOQ = Sqrt (2DS/IC) = Sqrt(2 X 5000 X 100 / 20) = 224 Bikes

(b)- TC = (Q/2)(IC) + (D/Q)(S) + (D)(C) = (112)(20) + (5000/224)(100) + (5000)(200) = 2240 + 2232 + 1,000,000 =

$ 1,004,472 annually

GROCERY PLUS

Grocery Plus Wholesaler's computer records show the following for one of its inventory items: Mean
monthly demand = 8,000, Standard deviation of demand = I,000 per month Replenishment lead time =
2 weeks. If the desired service level is 95 percent, what is the statistical safety stock? What is the
reorder point?

SOLUTION:

ROP = (D)(LT) + SS

Safety Stock SS = Z* Sqrt((Std Dev of Demand)^2 * LT)

Z corresponding to 0.95 Service Level = 1.645 from Standard Normal Dist Table

LT = 2 weeks = 0.5 months (units have to be consistent)

Std Dev of Demand – 1000 per month

Therefore SS = 1.645*1000*Sqrt(0.5) = 1,163

Now ROP = (D)(LT) + SS = (8,000)(0.5) + 1,163 = 5,563

So we will re-order whenever the inventory goes down to 5,563 units.

If the item is expensive, we may consider the Safety Stock of 1,163 units too high from inventory
holding point of view. In that case we may reduce it and take some risk of lower Service Level / Stock
outs.