Phoenix Valley Lighting is preparing an inventory management plan for fluorescen
ID: 435893 • Letter: P
Question
Phoenix Valley Lighting is preparing an inventory management plan for fluorescent bulbs. They have a forecasted demand of 11,465 bulbs per month with a MAD of 208 bulbs per month. The lead time to receive bulbs is 1 week and they would like to have a 93% service level to avoid turning away customers. Their ordering cost is $492 and their holding cost is $1 per bulb (breakage)per year.
When doing all calculations assume that there are 4 weeks in 1 month and there are no other contractual requirements on order quantities or frequencies.
If following a fixed order quantity inventory management system, what should their order quantity be? Report your answer to two decimal places.
Explanation / Answer
Following are the relevant details for calculations :
Annual demand for bulbs = D = 11465 / month x 12 months = 137580bulbs
Ordering cost =Co = $492
Annual unit holding cost = Ch = $1
The required order quantity
= Square root ( 2 x Co x D / Ch )
= Square root ( 2 x 492 x 137580 / 1 )
= 11635.23
ORDER QUANTITY = 11635.23
ORDER QUANTITY = 11635.23