Minimizing inventory while still maintaining quick delivery

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Reference no: EM133283069

Assignment:

Cold Inc. is a frozen food distributor with 10 warehouses across the country. Iven Tory, one of the warehouse managers, wants to make sure that the inventory policies used by the warehouse are minimizing inventory while still maintaining quick delivery to ACold's customers. Since the warehouse carries hundreds of different products, Iven decided to study one. He picked the "peperoni special" from Caruso's Frozen Pizza (CFP). Demand for peperoni special averages 400 per day with a standard deviation of 150. Iven places his orders daily and orders from CFP arrive four days later. Further, it costs ACold $0.01 per day to keep a unit of pizza in inventory, while a back order is estimated to cost ACold $0.45 per unit.

(a) What base-stock level (i.e., order-up-to level) should Iven choose for CFPs if his goal is to minimize holding and backorder costs?

(b) What base-stock level minimizes inventory while maintaining a 95% in-stock probability?

(c) Suppose the base-stock level 2,800 is chosen. What is the annual holding cost assuming 260 days per year? Here, use the exact formula for safety stock.

(d) After implementing a new managerial accounting system, Iven has realized that there is a fixed cost of $20 every time an order is placed with CFP. He wonders whether he can improve his overall costs by changing the frequency of placing orders with CFP (i.e., by changing the review period of CFP inventory), while targeting for an in-stock probability of 97%. He considers review periods of one, two, three, and four days as candidates. What would you recommend? How does your recommendation relate to the EOQ model's recommendation?

Reference no: EM133283069

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