Sam’s Cat Hotel operates 52 weeks per year, 6 days per week, and uses a continuous review inventory system. It purchases kitty litter for $11.70 per bag. The following information is available about these bags.
Demand = 90 bags/week
Order cost = $ 54/order
Annual holding cost = 27 percent of cost
Desired cycle-service level = 80 percent
Lead time = 3 weeks (18 working days)
Standard deviation of weekly demand = 15 bags
Current on-hand inventory is 320 bags, with no open orders or backorders.
a. What is the EOQ? What would be the average time between orders (in weeks)?
b. What should R be?
c. An inventory withdrawal of 10 bags was just made. Is it time to reorder?
d. The store currently uses a lot size of 500 bags (i.e., Q = 500). What is the annual holding cost of this policy? Annual ordering cost? Without calculating the EOQ, how can you conclude from these two calculations that the current lot size is too large?
e. What would be the annual cost saved by shifting from the 500-bag lot size to the EOQ?