Question

The Hardware Warehouse is evaluating the safety stock policy for all its items, as identified by the SKU code. For SKU M4389, the company always orders 80 units each time an order is placed. The daily demand is constant, at 5 units per day; the lead time is normally distributed, with a mean of three days and a standard deviation of two days. Holding cost is $3 per unit per year. A 95% service level is to be maintained.

1)  What is the total annual holding cost?

Use Excel QM to show answer

Answer 1

Using QM, we get the following output:

Path: Go to QM tab on Excel ---> Alphabetical ----> Inventory ----> Reorder point/safety stock (with normal distribution)

Safety stock (SS) = 16.45

Total annual holding cost (THC) = (Q/2)*Ch + SS*Ch where

Q = order quantity = 80; Ch = holding cost/unit per year = $3; SS = 16.45

(80/2)*3 + (16.45*3) = $169.35

1). Total annual holding cost = 169.35