Air Alberta has been using (Q, r) inventory policy for a fast-moving spare part for one of its types of aircraft. The properties of this part are:

D = 1920 units/year

Standard deviation of yearly demand = 240

Lead time = 3 weeks

A = $15

Cost = $20/unit

i = 0.2 / unit / year

Whenever a shortage is impending, an expediting action is taken, avoiding the shortage (stock out). The cost of such action is roughly $200, independent of the magnitude of the shortage.

a. Determine the Q, r, fill rate, backorder level, and the expected total relevant costs. Use the stock out approach.

b. A management science graduate, working in Air Alberta’s Operations Research, says that increasing Q to 5 percent above the EOQ will reduce the expected total relevant costs per year. Evaluate this recommendation and discuss.

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