Federated Cooperatives Limited (FCL) is the largest wholesaler/distributor of food and hardware in western Canada. FCL uses the Inform forecasting and inventory software and the fixed order interval model to order products for its four warehouses. As illustration, consider the ordering of Energizer batteries by tire Calgary' warehouse. The purchase lead time is approximately 15 days. Suppose that there are only two types of Energizer batteries in the warehouse: Item &0378422CA, 6V Lantern battery with annual demand of 5,767 units and price of $3.85 each, and Item #0378539CA, 6V Lantern battery with annual demand of 603 units and price of $7.54 each.
a. Suppose that the fixed cost of a purchase order for one SKU is $ 3.50 and the variable cost of each additional line item (SKU) is $0.50. Also, suppose that holding cost rate is 20 percent of unit cost per year. Determine the optimal order interval.
b. The forecasted demand for Item#0378422CA is 138 units per week for the next few weeks and the standard deviation of demand is estimated to be 37 units per week. Currently there are 555 units on hand in the warehouse. The service level for this SKU is desired to be 98.5 percent. Calculate the ⌡max (order up to level) for this battery, and determine the current quantity to order.
c. If the demand forecast for Item #0378422C'A for the next five weeks was in fact 144.2, 144.2, 133.1, 133.1, and 122 units, respectively (i.e., this item has seasonality), how would your answer to part b change? Assume that the standard deviation of demand remains at 37 units per week.