Reference no: EM133258316

Kelvin is the store manager for a bicycle retailer store in Ion Orchard. Last year, the sales of the bicycles were stable and are shown in Table 1. To keep sufficient stock to satisfy customer demands, Kelvin places orders to the supplier when stock on hand falls below a certain level. The bicycles are kept at a rented warehouse in Tanjong Katong. It is estimated that the holding cost per unit is 30% of its purchase price of $200. The supplier charges a $100 transportation cost to deliver the bicycles to the warehouse.

Table 1: Bicycle Sales

Sales (units)

January 100

February 110

March 100

April 80

May 100

June 100

July 120

August 90

September 110

October 100

November 100

December 90

Kelvin is wondering how many bicycles he should order from the supplier to minimize the inventory cost.

(a) Determine the best order quantity he should be ordering from the supplier.

(b) Discuss the reasons for using the method in part (a) to determine the best order quantity. What are the assumptions for the method?

(c) How much will the total inventory cost change (in percentage) if Kelvin decides to order 2% more or 2% less than the best quantity of bicycles? What can you infer based on the findings?

(d) How often should Kelvin place orders with the supplier?

(e) What should be the reorder level, ROL, if the replenishment lead time is 2 months?