Demand uncertainty add to relevant annual inventory cost

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Reference no: EM131271599

Suppose you are playing the Littlefield Game and you forecast that the daily demand rate stabilizes after day 120 at a mean value of 15 units per day with a standard deviation of 4 units per day. Each customer demand unit consists of (is made from) 60 kits of material. The cost per kit is 10$ and so the unit cost is 600 $/unit. The effective annual interest rate for carrying inventory is 10%; and the company operates for 350 working days each year. The fixed order cost is 1000 $/order. The lead time for delivery of kit replenishment orders placed with the supplier is 4 days. Item inventory replenishment is automatically controlled using a computer program that follows a (Q,r) policy.

A. Calculate a good value for the order quantity Q and a good Power-of-Two reorder interval in days corresponding to your Q (clearly show the approach you used to pick your Power-of-two reorder interval). By what percentage does the power-of-two reorder interval increase relevant annual fixed order and inventory cycle-stock holding costs, relative to the optimal [economic] reorder interval?

B. Calculate a good reorder point, r, corresponding to a target in-stock service level probability or critical ratio of 90%. How much cost does the demand uncertainty add to your relevant annual inventory cost (due to the safety stock)? Why is it worth adding these costs?

C. Ceteris paribus (all else remaining equal), how much does your relevant annual cost increase if you doubled your order quantity? Ceteris paribus, how much does your relevant annual cost increase if you doubled your reorder point?

Reference no: EM131271599

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