How do you think each system can affect your procurement procedures/methods?

Your firm uses a periodic review system for all SKUs classified, using ABC analysis, as B or C items. Further, it uses a continuous review system for all SKUs classified as A items. The demand for a specific SKU, currently classified as an A item, has been dropping. You have been asked to evaluate the impact of moving the item from continuous review to periodic review. Assume your firm operates 52 weeks per year; the item's current characteristics are:

Demand (D) = 15,080 units/year

Ordering cost (S) = $125.00/order

Holding cost (H) = $3.00/unit/year

Lead time (L) = 5 weeks

Cycle service level = 95 percent

Demand is normally distributed, with a standard deviation of weekly demand of 64 units.

EOQ = Sqrt ( 2*D*S /H )= Sqrt (2*15080 * 125 / 3) = 1121 Unit

Number of orders per year = D/EOQ = 13.45

Safety stock = Z * Standard Deviation * sqrt(L)

Z @ 95% from normal distribution tables = 1.65

Safety stock = 1.56 * 64 * sqrt(5) = 236 unit

P = (Working Weeks in a year/number of orders) = (52/13.45) = 3.87 rounded ==> 4 weeks

The protection interval ( p + L) is an aggregate of the time between reviews and the lead time.

4+5 = 9 Weeks

Safety stock = Z * Standard Deviation * sqrt(P+L)= 1.65 * 64 * sqrt(4+5) = 316.8 317 Unit

1. How do you think each system can affect your procurement procedures/methods?