You are in charge of managing inventory for an electronic equipment company based in West Virginia. You have a product, Supersonic Headphones 7-Z-1, with annual demand of 3645 units and a purchase cost of $8 per unit. You must pay $25 to process each order and the lead time from the vendor is 4 weeks. You take ownership of the items upon placing the order. The annual RMSE of the forecast is 608 units and your firm uses a holding cost of 0.16 $/$/yr. Assume 52 weeks per year. You currently manage this product using a (s,Q) policy.

What order quantity (Q) do you recommend?

How frequently do you expect to place these orders? (Introduce your answer in weeks.)

Leonard Walker, the VP of Sales, has insisted that the cycle service level for this item needs to be 95%.

What should the reorder point (s) be to ensure this service level?

Judith Thompson, the VP of Operations, disagrees with Mr. Walker and says that the inventory policy should be set so that each item stocked out incurs a penalty cost of $1.9.

What should the reorder point (s) be considering this penalty cost per item short?

After considering all the options, your boss decides to set a 95% Cycle Service Level, but she wants you to determine how to change to a (R,S) policy where you order every quarter (13 weeks). Determine the parameters of this new policy:

Average order quantity (Q)

Order up to point (S)

Answer rating: 100% (QA)

To determine the optimal order quantity Q and reorder point s for the s Q policy we can use the Economic Order Quantity EOQ formula and the service le... View the full answer