Question

Bob Sean, manager at Ikea is responsible for managing the inventory of computer desks. Bob isn't talkative about his inventory, but you have managed to extract the following information from him:

It costs $35 to place an order. Each computer desk costs $31.33. Annual per unit holding cost is 30% of item value. Average daily demand is 100 writing desks. Standard deviation of demand during lead time is 51.96. Lead time to receive a computer desk from a supplier is 3 days. Target service level is 94%. Ikea is open 5 days a week, 52 weeks a year. The company follows a continuos review policy.

a) Please help bob out by determining the order Q, reorder point and the safety stock for computer desks.

i) Order quantity

ii) Reorder point

iii) Safety Stock

b) Bob's supervisor, Sean believes that the service level should be 98%, instead of 94%. and wants bob to reasses the appropriate order quantity and reorder point. Should the order quantity change? Please tell Bob what needs to be recomputed and what the new value would be.

i) Order Quantity

ii) Reorder point

iii) Safety Stock

Answer 1

Answer to question a :

Following details have been provided :

Annual demand of writing desks = D = 100 / day x 5 days/ week x 52 weeks = 26000 writing desks

Order placement cost = Co = $35

Annual unit holding cost = Ch = 30% of $31.33 = $9.399 per unit ( $ 9.4 per unit rounded to 1 decimal place)

Therefore, Order quantity

= square root ( 2 x Co X D / Ch )

= square root ( 2 x 35 x 26000/ 9.4)

= 440

Z value for 94% service level = NORMSINV ( 0.94 ) = 1.5547

Standard deviation of demand during lead time = 51.96

Therefore , Safety stock = Z value x standard deviation of demand during lead time = 1.5547 x 51.96 = 80.78 ( 81 rounded to nearest whole number )

Reorder point = Daily demand x Lead time ( days ) + safety stock = 100 x 3 + 81 = 381

ORDER QUANTITY FOR COMPUTER DESKS = 440

REORDER POINT = 381

SAFETY STOCK = 81

Answer to question b :

Order quantity will remain UNCHANGED with change in service level.

What will be affected by change in service level are Safety stock and reorder level

Service level = 98 %

Corresponding Z value = NORSINV ( 0.98 ) = 2.0537

Standard deviation of demand during lead time = 51.96

Therefore , revised safety stock = 2.0537 x 51.96 = 106.71 ( 107 rounded to nearest whole number )

Reorder point = Daily demand x Lead time ( days ) + safety stock – 100 x 3 + 107 = 407

REVISED REORDER POINT = 407

SAFETY STOCK = 107