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Minimize Annual Cost for Home Depot, Inc.

A product sold by Home Depot, Inc., with an annual demand of 1000 units has Co = $25.50 and Ch = $8. The demand exhibits some variability such that the lead-time demand follows a normal probability distribution with µ = 25 and standard deviation = 5.

a. Determine the recommended order quantity.

b. Determine the reorder point and safety stock if the firm desires, at most, a 2% probability of stock-out on any given order cycle.

c. If a manager sets the reorder point at 30, determine the probability of a stock-out on any given order cycle. Determine the number of times the manager should expect a stock-out during the year if this reorder point were used.

Solution Summary

The solution contains optimal order quantity calculations to minimize ordering cost, inventory carrying cost and backorder/planned shortage cost. It also includes a step-by-step explanation. This solution is 494 words and is attached in a Word document.