5.

Ordering Eggs

a) Economic Order Quantity Computation:

It identifies the optimal order quantity by minimizing the sum of certain annual costs that vary with
order size and order frequency.
Average demand of eggs: 1600
Holding Cost: $0.02/egg
Ordering Cost: $40.00
EOQ = where D is the average demand, S is ordering cost and H is the holding cost.
By calculating, we get a value of 2529.82, rounding off to 2530.
Therefore, the order should be 2530 eggs.

b) Safety Stock:
Here to compute the safety stock of eggs at 99.87% service level, We take the assumption that the daily
average of eggs is normally distributed, we would need to use the Z-Table.
Referring to Z Table, we get z = 3.00, for p(z) = 0.9987
Safety Stock Computation: Z x Standard Deviation x Square Root of Lead Time Z = 3.00 Standard
Deviation = 400 Lead Time = 1 Square Root of Lead Time = 1
Therefore, Safety Stock = 3.00 * 400 * 1
= 1200 eggs

c) Reorder Point:
Reordering Point = Expected Demand in Lead Time + Safety Stock Average Demand = 400 Lead Time
= 1 Day Safety Stock = 1200 Eggs Reordering Point = (400*1)+1200
= 1600 eggs
Therefore, the company should order eggs as soon as the inventory level reaches 1600. d) Days of Supply
as expression of Reordering Point:
It is the ratio between Reordering Point and standard deviation.
= 1600/400
= 4 Days
e) Average eggs on hand:
First we take the average of Economic Order Quantity and add Safety Stock.
= (EOQ/2) + Safety Stock
= (2530/2)+1200
= 2464.91 eggs
Therefore, we will have roughly 2465 eggs on hand in the inventory.
In terms of Days of Supply, it means how many days the current inventory would last given the current
rate of demand.
To compute it, we take into consideration the average eggs in hand and the average daily demand.
= 2465/1600
= 1.54
Therefore, it means that we have enough stock to supply for 1.5 days of the demand arising.

f)Days of supply Coefficient Variation:

The days of supply coefficient variation needs to be calculated on a 2-sigma level of meeting the demand
97.7% of the times.
For that we need to consider the variance and the standard deviation.
= 2465/400
= 6.16 days
We can meet the demand for 6.16 days.