An office supply store open 5 days a week must determine the best inventory poli
ID: 1211295 • Letter: A
Question
An office supply store open 5 days a week must determine the best inventory policy for boxes of copier paper. Weekly demand is nearly constant at 250 boxes and when orders are placed, then entire shipment arrives at once. The cost per box is $22 and the inventory holding cost is 30%. Orders are placed at a cost of $40 each, including preparation time and communication charges, and the lead time is 2 days. Find the optimal order quantity. How often should an order be placed? How many orders will be placed in a year? What is the total annual cost?Explanation / Answer
Calculations:
Let µD be the weekly demand = 250.
Then annual demand = µD × 52 = 13,000
Lead time (L) days = 2days
Lead time (L) weeks = 0.4 days
Safety stock (ss) = 0
Now, calculate the reorder point:
Reorder point = µD × L + ss = 250 × 0.4 + 0 = 100.
From the given data:
Unit price (P) = 22
Ordering cost (O) = 40
Annual holding rate (CR) = 30%
Annual holding cost (H) = P × CR = 22 × 30% = 6.6
Now, calculate the optimal order quantity:
EOQ = (2DO/H) = (2 × 250 × 20 / 6.6) = 397
Frequency of order placed (N) = D/Q = 33 times per year
Cycle time (1.6 weeks) = 52/N = 7.9 days