Daily consumption of fasteners at Boeing commercial airplane manufacturing facility is normally distributed with a mean of 1,000 and a standard deviation of 150. Each fastener costs $ 2. Boeing reviews its inventory every 2 weeks and places an order to bring the inventory position of fasteners to a target level. Lead time for replenishment of an order is 1 week. Annual holding cost is 25% of unit cost.
a. Assuming that Boeing wants to keep a 98% in- stock probability, determine the target order up-to level and the resulting cycle and safety stock. What is the total inventory holding cost of following this policy?
b. There is a proposal to institute process improvements such that inventory could be reviewed and orders placed every week. Determine the total savings in inventory of this process change.