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Lecture4 Inv f06 604
Lecture4 Inv f06 604
2
1
Order quantity
EOQ=
H
DS 2
M-I
Reorder point
L L
z r o + =
Replenishment level
L T L T
z M
+ +
+ = o
Annual number of
orders
Q
D
T
1
T is in years
Comparison Between P and Q models
57
Example 7: Statewide Auto parts uses a 4-week periodic-
review system to reorder parts for its inventory stock. A 1-
week lead time is required to fill the order. Demand for
one particular part during the 5-week replenishment
period is normally distributed with a mean of 18 units and
a standard deviation of 6 units.
a. At a particular periodic review, 8 units are in inventory.
The parts manager places an order for 16 units. What is
the probability that this part will have a stockout before an
order that is placed at the next 4-week review period
arrives?
B. Assume that the company is willing to tolerate a 2.5%
chance of stockout associated with a replenishment
decision. How many parts should the manager have
ordered in part (a)? What is the replenishment level for the
4-week periodic review system?
58
Example 8: Rose Office Supplies, Inc., uses a 2-week
periodic review for its store inventory. Mean and standard
deviation of weekly sales are 16 and 5 respectively. The
lead time is 3 days. The mean and standard deviation of
lead-time demand are 8 and 3.5 respectively.
A. What is the mean and standard deviation of demand
during the review period plus the lead-time period?
B. Assuming that the demand has a normal probability
distribution, what is the replenishment level that will
provide an expected stockout rate of one per year?
C. If there are 18 notebooks in the inventory, how many
notebooks should be ordered?
59
Example 9: Foster Drugs, Inc., handles a variety of health
and beauty products. A particular hair conditioner product
costs Foster Drugs $2.95 per unit. The annual holding cost
rate is 20%. A fixed-quantity model recommends an order
quantity of 300 units per order.
a. Lead time is one week and the lead-time demand is
normally distributed with a mean of 150 units and a
standard deviation of 40 units. What is the reorder point if
the firm is willing to tolerate a 1% chance of stockout on
any one cycle?
b. What safety stock and annual safety stock cost are
associated with your recommendation in part (a)?
c. The fixed-quantity model requires a continuous-review
system. Management is considering making a transition to
a fixed-period system in an attempt to coordinate ordering
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for many of its products. The demand during the proposed
two-week review period and the one-week lead-time period is
normally distributed with a mean of 450 units and a standard
deviation of 70 units. What is the recommended
replenishment level for this periodic-review system if the firm
is willing to tolerate the same 1% chance of stockout
associated with any replenishment decision?
d. What safety stock and annual safety stock cost are
associated with your recommendation in part ( c )?
e. Compare your answers to parts (b) and (d). The company is
seriously considering the fixed-period system. Would you
support the decision? Explain.
f. Would you tend to favor the continuous-review system for
more expensive items? For example, assume that the product
in the above example sold for $295 per unit. Explain.
61
Text Problem 5, Chapter 15: Charlies Pizza orders all of its
pepperoni, olives, anchovies, and mozzarella cheese to be
shipped directly from Italy. An American distributor stops by
every four weeks to take orders. Because the orders are
shipped directly from Italy, they take three weeks to arrive.
Charlies Pizza uses an average of 150 pounds of pepperoni
each week, with a standard deviation of 30 pounds.
Charlies prides itself on offering only the best-quality
ingredients and a high level of service, so it wants to ensure
a 98 percent probability of not stocking out on pepperoni.
Assume that the sales representative just walked in the door
and there are currently 500 pounds of pepperoni in the walk-
in cooler. How many pounds of pepperoni would you order?
62
Text Problem 10, Chapter 15: The annual demand for a
product is 15,600 units. The weekly demand is 300 units
with a standard deviation of 90 units. The cost to place an
order is $31.20, and the time from ordering to receipt is
four weeks. The annual inventory carrying cost is $0.10 per
unit. Find the reorder point necessary to provide a 98
percent service probability.
Suppose the production manager is asked to reduce the
safety stock of this item by 50 percent. If she does so, what
will the new service probability be?
63
Reading and Exercises
Chapter 15 pp. 586-609
Exercises:
Chapter end problems 4,5,6,10,12,14 and 20
Examples 5, 8 and 9