InstraMatronics, a distributor of electrical monitoring equipment, is looking to reduce inventory costs. Hal, the new materials manager, is considering the inventory policy for HS008, a popular device used to monitor and control many environmental conditions in manufacturing settings. Hal has recently discovered that over the last 5+ years since the HS008 was added to the InstraMatronics product line, the inventory of HS008 has never fallen below 41 units and is typically much higher, even just before the arrival of new shipments. These high inventory levels have provided a 100% service level and very high inventory holding costs for these expensive devices. Hal would like to accept a lower service level (88% during lead time) to reduce holding costs. The lead time to receive orders from the supplier in Japan has consistently been about two months. Currently, InstraMatronics has 1178 units of HS008 in inventory, and there are currently no outstanding orders for additional inventory. This is the only product that InstraMatronics orders from this particular supplier. The estimated transaction cost per order placed is $100, and the annual per unit inventory holding cost is considered to be 24% of the purchase price. The supplier offers discounts for large orders. The pricing works as follows:

Order Quantity Unit Price Item: HS008 1 – 299 $500.00 Supplier Location: Japan 300 – 999 $480.00 Constant Lead Time: 2 Months 1000 + $470.00

Sales data for the 5+ years that InstraMatronics has carried the HS008 is given in the InstraMatronics Sales Data spreadsheet. During the last 4+ years, a new forecasting system has been in use, and forecasts are shown alongside the actual sales data. Also included are future forecasts for the next several months. While InstraMatronics has chosen to keep records of sales on a monthly basis (see spreadsheet), this is unrelated to inventory replenishment options. It is very possible to order from the supplier with any frequency desired (e.g., small quantities could be ordered several times per month, or large orders could be placed every few months, etc.). Orders can be placed at any time during a month. Hal would like you to recommend a continuous review inventory policy for HS008. This new policy will work as follows. Based on the values of Q and R that you determine (assignment below), when the inventory position falls to R, an order will promptly be placed for Q units.

Course Materials – Darwin J. Davis, PhD – All Rights Reserved, 2022 Page 2 of 3

Assignment You are asked to determine the order quantity (Q) and reorder point (R) that you would recommend for the next order of HS008.

Use your knowledge of inventory methods as you develop your recommendation. Consider the models we have used in class and use those that are appropriate to the available data and the decisions that need to be made. As you determine demand estimates for use in equations, take care to make the estimates relevant to the likely time period of the next inventory replenishment order that will be placed. Please explain how you created your demand estimates.

InstraMatronics will use the values of Q and R that you recommend for placing the next order for HS008. Hal would also like your guidance on keeping up-to-date values of Q and R. Please consider all of the information in this document and the spreadsheet and make a recommendation about when these values should next be recalculated/updated, and clearly share the reasoning behind your recommendation.

Question: Your recommendations for updating Q and R and the reasoning behind your recommendations. (For the very next order, management will use the values of Q and R that you calculated. Here you are being asked to provide recommendations for keeping Q and R up-to-date going forward.)

Answer rating: 100% (QA)

InstraMatronics should set R to be equal to the average number of units sold per month plus a buffer ... View the full answer