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.
a. Determine the order quantity at which the total inventory costs would be minimized?
b. What is the reorder point?
c. 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?