One of the products sold by OfficeMax is a Hewlett-Packard DeskJet Z4480 printer. As purchasing manager, you have the following information for the printer.
Average weekly demand 60 printers (52 weeks per year):
Standard deviation of weekly 12 printers demand:
Order lead time: 3 weeks
Standard deviation of order 0 (lead times are constant)
lead time:
Item cost: $120 per printer
Cost to place an order: $2
Yearly holding cost per $48 printer:
Desired service level during 99% (z = 2.33) reordering period:
a. (*) What is the economic order quantity for the printer?
b. (**) Calculate annual ordering costs with holding costs (ignoring safety stock) for the EOQ. What do you notice about two?
c. (**) Suppose OfficeMax currently orders 120 printers at a time. How much more or less would OfficeMax pay in holding and ordering costs per year if it ordered just 12 printers at a time? Show your work.
d. (**) What is the reorder point for the printer? How much of the reorder point consists of safety stock? For parts e and f, use the following formula to consider the impact of safety stock (SS) on average inventory levels and annual holding costs: (Q/2 + SS)(H)
e. (***) What is the annual cost of holding inventory, including the safety stock? How much of this cost is due to the safety stock?
f. (***) Suppose OfficeMax is able to cut the lead time to a constant 1 week. What would the new safety stock level be? How much would this reduce annual holding costs?