Question

# A manufacturing company keeps stock of replacement parts for its critical equipment. The lead time for...

A manufacturing company keeps stock of replacement parts for its critical equipment. The lead time for a rare \$500 part is 2 months. The maintenance manager keeps close track of the inventory of these parts and places a new order whenever the stock reaches a certain threshold or reorder point. When they order, they place orders of 20 units at a time because the supplier has to make a special production run for it. From past history they estimate that the monthly demand for spares can be modeled as a Poisson distribution with a mean of 3.

a) Calculate the reorder point to achieve a fill rate of 95%.

b) Calculate the resulting average backorder level associated with this ordering policy.

c) Calculate the average monthly inventory cost assuming annual carrying cost of 24%.

#### Homework Answers

Answer #1
 Given Information Data Cost Price \$                         500 Re-Order Quantity 20 Average Monthly Demands 3 Annual Demand 36 Average Lead Time 2 Months Carrying Cost [in \$] 120 [24% * \$500] Assumption: It is assumed that Maximum and minimum demand / lead time are to be more than or less than average demand/ lead time given. Level Demand Lead Time Maximum 4 [Assumed] 3 Months [Assumed] Average 3 [Given] 2 Months [Given] Minimum 2 [Assumed] 1 Months [Assumed] Solution to A. Units Re-Order Level 11.40 [ Maximum Demand per day X Maximum lead time]*95% Solution to B. Minimum Level 5.40 [Re-Order Level-(Average Demand per day X Average Lead time] Maximum Level 29.40 [Re-Order Level + Re- Order Quantity-(Minimum Demand per day X Minimum Lead time] Average Back-Order Level [Maximum Level+ Minimum Level]/2 17.40 OR [Minimum Level+1/2*Re-Order Quantity] 15.40 Solution to C. \$ Average Monthly Inventory Cost [in \$] 1,200 [Re-Order Quantity*1/2*Carrying cost per unit]
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