Problem 1.

Monthly demand for Toy model at a Best Buy Store is normally distributed, with a mean of 35 units and
a standard deviation of 10 units. If backorder occurs, the store must pay $65 for each toy model instead
of $40. Assume that the carrying rate r = 35% per month.

Calculate the base stock level?

Solution:

h = 40*0.35 = 14

b = 25

G(R) = 25/(25+14) = 0.6410

 Z = 0.36  R* = 39

Problem 2.

An ophthalmologist’s office operates 52 weeks per year, 6 days a week. It purchases disposable contact
lenses for $11.70 per pair and sells for $50. Demand is 90 pairs per week. Order cost is $54 per order.
Annual interest rate is 27%. Lead-time is 3 weeks. Standard deviation of weekly demand is 15 pairs.
Given that 98% service-level. Clearly identify different types of stocks: cycle, safety and pipeline.

a. Find a (Q, r) policy for this situation

b. Find average order frequency of the policy (a)
c. Find average service level (fill rate) of the policy (a)
d. Find average backorder level of the policy (a)
e. Find average inventory level of the policy (a)

Solution:

a. (Q,r) model

Order Size Q

In some problems, Q is given. Here it is not, so let us use Q=EOQ.

2 * (52 * 90) *54 (0.27 *11.70)

set Q = EOQ = =400

ordering cost = (90*52/400)*54=631.80 per year

Reorder Point R

Demand during lead-time: mean = 90*3 = 270 ; std. dev. = sqrt(3)*15 = 26

service level =98%, corresponding z = 2.05,

R = 270+2.05*26 = 323.3

SS = 2.05*26=53.3

Average inventory = Cycle stock +SS = (400/2)+ 53.3=253.3

Holding cost = 0.27*11.70*253.3 = 800.17 per year

Cycle stock is 200, safety stock is 53.3 and pipeline stock is equal to mean DDLT=270.

Problem 3.

Assume weekly demand during lead time follows normal distribution N(100,3 2). Ordering cost is $200
per order. Unit cost is $40 per computer and carrying rate is 0.1 $/$/week. Backordering cost is $30.
Lead time is 2 weeks.

Using iteratively method to find a (Q, r) policy for this case?