Reference no: EM132289581

A company manages its inventory with respect to a certain item according to a periodic review policy that places orders on a weekly basis, and uses a “planning horizon” of 6 weeks. More specifically, at the beginning of each week, the company assesses / forecasts the item expected demand for the next six weeks, and determines an ordering plan for this interval according to a specified decision rule that tries to control its ordering and holding cost, while taking into consideration the company’s inventory position with respect to this item. Subsequently, the company orders to its local supplier the quantity suggested by the ordering plan for the first period. This quantity is delivered by the supplier within a few hours by the order placement, and helps the company meet its needs for the running week. At the beginning of the next week, this whole cycle is repeated with an updated forecast for the next six weeks (this scheme is known as a “rolling horizon”-based policy and allows the companies to accommodate any changes that might have occurred in their operational environment).

The expected demand for the next six weeks is estimated at 100, 150, 75, 75, 50 and 60 units. The inventory currently held by the company with respect to this item is 60 units. Finally, each delivery costs the company $80 and the inventory holding cost is estimated at $0.75 per unit per week.

Determine the order size that should be placed by the company to its supplier assuming that the applied decision rule is the optimal policy for uncapacitated dynamic lot sizing, suggested by the Wagner-Whitin property.

Can you see any potential problems with applying this policy in the considered application context?