Question

3. Whole Foods Market sells Kaiser brand sausages. The market demand for Kaiser Sausages is uncertain but the mean is estimated to be 136000 packages/year with a standard deviation of 6800 packages/year. For each supply order processed the fixed cost includes a handling cost of $165/order plus a shipping cost of $390/order from the Kaiser warehouse to the Whole Foods Market. The holding cost for the sausage is $1.4/package/year.

The supply lead time is fixed at 2 weeks.

(i) For a target service level of 90% what is the (Q,R) reorder policy ? Assume 52 weeks in a year. 1) Q (Economic Order Quantity) = Integer answer required.

2) R (Reorder Level in decimal places) =

Answer 1

Annual Demand (D) = 136000 packages

weekly demand (d) = D/52 = 2615.38

Standard Deviation of demand (Sigma) = 6800 packages/year

Cost per order (S) = Fixed cost per order + Shipping Cost = 165 + 390 = $555

Annual Holding Cost per unit (H) = $1.4

Lead time (L) = 2 weeks = 2/52 years

For a target service level 90%, Z = NORMSINV(0.9) = 1.2816

1) EOQ

Q = 10384 packages

2)

Reorder Point (ROP) = Demand during lead time + Safety Stock (SS)

Demand during lead time = d*L = 2615.38*2 = 5230.76

SS = Z*Sigma*SQRT(L) = 1.2816*6800*SQRT(2/52) = 1709.13

Reorder Point (ROP) = 5230.76 + 1709.13 = 6939.89 packages