Consider the following information on an inventory management system:
Item Cost: $10
Order Cost: $250
Annual Holding Cost: 33% of item cost
Annual Demand: 25,750
Average Demand: 515 per week
Std. Dev. of Demand: 125 per week
Leadtime: 2 weeks
1. Ignoring the uncertainty in the demand (i.e. looking only at average values), find the optimal order quantity and the reorder point. What is the annual inventory holding and ordering cost for this policy?
2. Consider now the uncertainty. The order quantity remains the same. If the target is to have a 98% fill rate, what should be the reorder point? What is the safety stock? How much additional inventory cost is incurred due to the safety stock? What should be the reorder point?