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Calculating various inventory paremeters

SuperValue Foods is a supermarket that stocks a special brand of cookies called Classic Cookies it purchases from Distinctive Foods. Demand for Classic Cookies is 5000 boxes per year (365 days) and the daily demand can be assumed to be a constant. The cost of ordering a batch of boxes of cookies is $80 per order including the cost of shipment. Carrying cost including shelf space costs and the opportunity cost of carrying inventory is $0.50 per box per year. Once an order is placed with Distinctive Foods it takes 4 days to receive the order from the vendor.

Determine:
a) Optimal order size
b) Minimum total annual inventory cost
c) Order cycle time

Now assume that the demand pattern for the cookies has changed so that the daily demand can now be approximated by a normally distributed random variable with the average being the same as the previous daily demand but with a standard deviation of 3 boxes per day.

Determine:
d) Reorder point assuming a service level of 95%
e) Change in the level of the safety stock if the store requires a service level of 99% instead of 95%

Solution Preview

Determine:

a) Optimal order size
D =Total demand= 5000 boxes per year
S = ordering cost=$80 per order
H = holding costs=$0.50 per box per year
EOQ=(2DS/H)^0.5=(2*5000*80/0.5)^0.5=1264.91 or 1265 boxes

b) Minimum total annual inventory cost
Total ordering cost=(D/EOQ)*S=(5000/1265)*80=$316.21
Total carrying cost=(EOQ/2)*H=(1265/2)*0.50=$316.25
Minimum total inventory cost =Total ordering cost+ Total ordering cost
...

Solution Summary

Solution describes the steps to calculate optimal order size, minimum inventory cost, order cycle time, reorder point and safety stock.

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