Firm order each time so as to minimize total inventory costs

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Reference no: EM132296801

1. Pepsi Co. desires to control inventory levels so as to minimize the sum of holding and ordering costs. It costs the firm $20 to place an order. The firm estimates its inventory carrying costs at $2/unit/year. Weekly demand is 100 units and there are 50 weeks in the work year. The item costs $10 per unit. Lead-time for the product is 2 weeks.

a. What quantity of items should the firm order each time so as to minimize total inventory costs?

b. How often will Pepsi have to place this order if Q = 400?

c. If 1000 are ordered each time, then what will be the total annual order cost?

d. In order to not run out of stock before the receipt of a new order, at what inventory level should the firm place an order?

e. Suppose that the weekly standard deviation of demand is 30 units. If Pepsi wants to maintain a 95% cycle-service level. What is Pepsi’s reorder point?

f. Suppose that Pepsi has an order quantity of 500 and a safety stock of 50. What is Pepsi’s cost associated with holding this safety stock?

2. Cat Lovers Inc. (CLI) is the distributor of a very popular blend of cat food that sells for $1.25 per can. CLI experiences demand of 500 cans per week on average. They order the cans of cat food from the Nutritious & Delicious Co. (N&D). N&D sells cans to CLI at $0.50 per can and charges a flat fee of $7 per order for shipping and handling. CLI uses the economic order quantity as their fixed order size. Assume that the opportunity cost of capital and all other inventory cost is 15 percent annually and that there are 50 weeks in a year.

a. How many cans of cat food should CLI order at a time?

b. What is CLI’s total order cost for one year?

c. What is CLI’s total holding cost for one year?

d. What is CLI’s weekly inventory turns?

3. Firms typically carry some safety stock of raw materials as a buffer against a delivery delay from a supplier. Why is safety stock generally not an attractive buffer against a catastrophic disruption (e.g., a major earthquake) of a supplier?

4. Suppose that Boundaries Bookstore sells books in traditional bricks-and-mortar outlets, while Jungle.com sells books over the Internet. Hence, Boundaries holds separate stocks of a given book in each store, while Jungle.com holds all its inventory in a central warehouse. Both firms use a continuous review inventory policy in which the reorder point is the sum of average demand during lead time plus safety stock. a. Suppose that Boundaries has 100 outlets and the desired service level corresponds to a safety factor of z = 2. If a particular book sells an average of 10 copies per month at each store, with a standard deviation of 3, how much safety stock will the firm carry across all its outlets? b. Suppose that Jungle.com sells the same number of books (i.e., 1000 copies) as Boundaries. Further, suppose that its demand process behaves like the sum of the demand at the 100 Boundaries stores (assume demand at each store is independent). With a safety factor of z = 2, the same as Boundaries’, how much safety stock will the firm carry?

Reference no: EM132296801

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