Inventory Management
A local service station is open 7 days per week, 365 days per year. Sales of 10W40 grade premium oil average 18 cans per day. Inventory holding costs are $0.55 per can per year. Ordering costs are $8 per order. Lead time is two weeks. Backorders are not practical – motorists drive away. The boss is concerned about inventory because demand really varies. The standard deviation of demand was determined from a data sample to be 6.15 cans per day. The manager wants a 94% service level.
- Determine the order quantity at which the total inventory costs would be minimized?
- What is the reorder point?
- Illustrate the order quantity, reorder point, safety stock and lead time on a diagram where the Y-axis represents the number of oil cans and the x-axis represents the time. What is the maximum possible inventory in the system at any point of time?