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Computing Optimal Ordering Quantity Safety Stock

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You are buying an important electronic component from a supplier in China. The component costs \$360 and you incur a fixed shipment charge of \$5000 whenever you order. You use a 20% interest rate to compute holding costs. The daily demand for the product is normally distributed with mean 5 pieces and standard deviation 2 pieces. The lead time from China is 50 days. Assume 360 days per year. You would like to have a service level of 99%.

A) What is the optimal ordering quantity, safety stock and reorder point?

B) What is the total annual cost including setup costs, holding costs and purchasing costs?

C) The supplier has promised to undertake an improvement in his lead times so that from now on he will always deliver in 40 days. How much is this improvement worth?

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Solution Preview

You are buying an important electronic component from a supplier in China. The component costs \$360 and you incur a fixed shipment charge of \$5000 whenever you order. You use a 20% interest rate to compute holding costs. The daily demand for the product is normally distributed with mean 5 pieces and standard deviation 2 pieces. The lead time from China is 50 days. Assume 360 days per year. You would like to have a service level of 99%.

A) What is the optimal ordering quantity, safety stock and reorder point?
The formula for the optimal ordering quantity is Q=âˆš(2CD/h) ,where
D: The demand per year, which in this case is 5*360

Q: The order quantity.

C: ...

Solution Summary

The expert computes optimal ordering quantity safety stocks. The total annual cost including setup costs are determined.

\$2.49