Question

You are in change of inventory for a manufacturing company, and you are given the following information:

Table 3: Inventory Characteristics

Average Annual Demand	7800
Standard Deviation for Annual Demand	2600
Leadtime	2 weeks
Holding or Carrying Cost	15% per year
Fixed Delivery Cost per Shipment	$200
Price (value) per Item	$80
Stockout cost per Item	$20
Probability of being in stock during leadtime	85%

5 What is your optimal economic order quantity (integer)?

6 What is the reorder point? (Convert d to weeks.)

Answer 1

Economic order quantity = √2*A*O/{C*B/B+C)}

√2*10400*200/12 *20/20+12

√4160000/7.5=745 units ( approx.)

Here A= annual demand(7800+2600)

O=ordering cost per order or delivery cost(200)

C= carrying cost per unit per annum (80*15%)

B= Back order cost or stockout cost per unit per annum(20 per unit )

• Re-order quantity will be the above calculated EOQ
• Re-order level=maximum re-order period *maximum usage
• or (normal usage* normal delivery period)+safety stock

Re-order level=(7800/52)*2+(2600/52)

300+50=350 units