Problem - The manager in the local store of a national home improvement chain is studying their inventory system. He has chosen one high volume product as the first product to examine. The historical supply and demand data for this item has indicated a constant lead time of 16 days. Demand per day (d) is normally distributed with a mean demand of 1000 per day and standard deviation of 240 per day. He plans to set the in-stock probability (or service level) for this item at 90% during lead time. The ordering cost for this item is $500 per order. The product cost is $10 per unit. The annual inventory carrying cost is 30% of the item cost per year. The store operates 250 days a year. The manager decides to use the fixed quantity system (reorder point and economic order quantity). Based on the information provided, answer the following questions.
1. Use "NORMSINV" function in Excel to find the accurate z value. Based on the z value found, what is the safety stock level for this item?
2. What is reorder point?
3. What is the economic order quantity?
4. Using your answer in 3 (for example, if your answer for question 3 is 1231 after rounding, use 1231 here), how many orders will be placed per year under the policy you find?
5. Using your answers of safety stock in question 1 and EOQ in question 3, what is the average inventory level under the order policy you find (including cycle inventory and safety inventory)?
6. What is the annual ordering cost? Note: use your answer from question 4.
7. Using your answer from question 5, what is the annual inventory carrying cost including both cycle inventory and safety inventory?
8. Based on your answers to question 6 and 7, what is the total annual inventory cost?