Determining the inventory management costs

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Reference no: EM13809952

Safety Firms Inc. sells photographic products using an (R,S) type of control system. SFI is considering investing in a scanner such that they can move from an (R,S) type to an (R,Q) inventory policy. It is expected that with a continuous review policy, the firm could reduce inventory management costs significantly: holding and shortage costs could be reduced.

The unit cost of products is $10. Shipping and handling cost is $5. Demand for this year is estimated at 1,200 units. The inventory carrying cost is 0.12 $/$/year. Please use optimal (R,Q) policy, assuming a lead time, L=10 days, standard deviation of lead time = 35 units, to find the following:

a) EOQ

1. If a flat charge of $23.85 per stockout occasion (B1) is used please find

b) Safety stock (ss)

c) reorder point

d) Purchasing cost

e) Holding cost

f) Shortage cost and total cost

Repeat the process using the following options.

2. B2 = 25% of unit cost will be charged per unit short

3. B3 = 10% of unit cost will be charged per unit short per month

Based on your observation, which policy is the toughest based on total cost and which is the toughest based on the shortage cost?

Reference no: EM13809952

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