Foster Drugs, Inc., handles a variety of health and beauty aid products. A particular hair conditioner product costs Foster $2.95 per unit. The annual holding cost rate is 20 percent. Using an EOQ model, they determined that an order quantity of 300 units should be used. The lead time to receive an order is one week, and the demand is normally distributed with a mean of 150 units per week and a standard deviation of 40 units per week.
a. What is the reorder point if the ?rm is willing to tolerate a 1-percent chance of a stock out during an order cycle?
b. What safety stock and annual safety stock cost are associated with your recommendation in part a?
c. Foster is considering making a transition to a periodic-review system in an attempt to coordinate ordering of some of its products. The review period would be two weeks and the delivery lead time would remain one week. What target inventory level would be needed to ensure the same 1-percent risk of stock out?
d. What is the safety stock associated with your answer to part c? What is the annual cost associated with holding this safety stock
e. Compare your answers to parts b and d. If you were the manager of Foster Drugs, would you choose a continuous- or periodic-review system?