Consider a product for which the average demand is 70 items per day (for 365 days per year) and the standard deviation of demand is 10 per day. The product value is $3, the order cost is $30 per order, and the inventory carrying cost is 20% per year. The stockout cost is $0.50 per unit short. The probability of being in stock is to be 99%. The supplier has an average lead time of 5 days with a standard deviation of 1.5 days.

a) Design a reorder point system using the 99% probability of being in stock and (i) state the policy (order size and when to order) and (ii) the total annual cost.

Policy (order size and when to order):

Total annual cost = __________

b) If the product must be ordered in multiples of 500 items, design a reorder point system using the 99% probability of being in stock and (i) state the policy (order size and when to order), (ii) the total annual cost, (iii) the % increase from the cost in part a, and (iv) how many units they are out of stock on average each year.