A regional distributor purchases discontinued appliances from various suppliers and then sells them on demand to retailers in the region. The distributor operates 6 days per week, 52 weeks per year. Only when it is open for business can orders be received. The following data are estimated for a counter-top mixer:
Average daily demand: 100 mixers; standard deviation of daily demand: 30 mixers; lead time: 2 days; holding cost: $9.40/unit/year; ordering cost: $35/order; service level: 98 percent.
Suppose that a periodic review system is used (i.e. fixed period model) at the distributor, but the data are the same.
E) What is the target/maximum inventory level, S? Which system requires less safety stock?
F) What is the total cost of the periodic review system? Hint: The average order quantity will be the average consumption of inventory during the T periods between orders.
G) If cost were the only criteria, which system would you choose? List at least two factors that may sway the decision in favor of the periodic review system.
H) It is time to review the item. On hand inventory is 50 mixers, one open order for 140 mixers is pending (i.e. Scheduled receipts); and no backorders exist. How much should be ordered?