1. A firm is faced with the attractive situation in which it can obtain immediate delivery of an item it stocks for retail sale. The firm has therefore not bothered to order the item in any systematic way. However, recently profits have been squeezed due to increasing competitive pressures, and the firm has retained a management consultant to study its inventory management. The consultant has determined that the various costs associated with making an order for the item stocked are approximately $70 per order. She has also determined that the costs of carrying the item in inventory amount to approximately $27 per unit per year (primarily direct storage costs and forgone profit on investment in inventory). Demand for 16,500 units per year. When an order is placed for the item, the entire order is immediately delivered to the firm by the supplier. The firm operates 6 days a week plus a few Sundays, or approximately 320 days per year. Determining the following:
a. Optimal order quantity per order
b. Total annual inventory costs
c. Optimal number of orders to place per year
d. Number of operating days between orders, based on the optimal ordering
2. Kelly's Tavern serves Shamrock draft beer to its customers. The daily demand for beer is normally distributed, with an average of 20 gallons and a standard deviation of 4 gallons. The lead time required to receive an order of beer from the local distributor is 12 days.
Determine the safety stock and reorder point if the restaurant wants to maintain a 90% service level. What would be the increase in the safety stock if a 95% service level were desired?
3. The EastCoasters Bicycle Shop stocks bikes; helmets; clothing; a variety of bike parts including chains, gears, tires, wheels; and biking accessories. The shop is in a storefront location on a busy street and it has very limited storage space for inventory. It often runs out of items and is unable to serve customers. To help manage its inventory the shop would like to classify the stock using the ABC system.
Following is a list of items the shop stocks and the annual demand and unit value for each:
Item Amount Unit Item Amount Unit
Number Demand Cost Number Demand Cost
1 10 $8 17 110 $23
2 18 16 18 74 18
3 36 30 19 8 610
4 9 1230 20 10 935
5 4 760 21 7 270
6 3 810 22 5 1400
7 19 420 23 5 900
8 56 35 24 46 67
9 105 17 25 32 160
10 27 350 26 101 45
11 19 36 27 83 12
12 12 115 28 54 16
13 7 2300 29 14 42
14 10 245 30 9 705
15 6 665 31 7 37
16 18 28 32 16 26
Classify the inventory items according to the ABC approach using dollar value of annual demand.