Lesson 6 Exercises.

xls

Assume: 7 day week, 30 day month

Question 1:
Calculate the reorder points for the following SKUs:
a. Demand is forecasted at 420 for the next month. Leadtime is 2 weeks. Safety stock is set at 120 units.
b. Demand is forecasted at 6300 for the next week. Leadtime is 4 days. Safety stock is set at 1.5 FDS.
c. We expect to take orders totalling 10,000 for the year for a non-seasonal product. It takes 2 days to
review and place the replenishment orders, the supplier takes 10 days to process and ship the order,
transportation takes 3 days, receiving takes 1 day, and putaway takes 0.5 days. Safety stock is set at 2
weeks’ supply.

Solution 1 a:
Daily Demand, DD = 420 ÷ 30 = 14

Reorder Point, RP = D X T + SS
= 14 X 14 + 120 = 316

Solution 1 b:
Daily Demand, DD = 6300 ÷ 7 = 900

Safety Stock, SS = 1.5 FDS = 1.5 X 900 = 1350

Reorder Point, RP = D X T + SS
= 900 X 4 + 1350 = 4950

Solution 1 c:
Leadtime, T = 2 + 10 + 3 + 1+ 0.5 = 16.5

Weekly Demand = 10000 ÷ 52 = 192.31

So, Safety Stock, SS = 2 X 192.31 = 384.62

Daily Demand, DD = 192.31 ÷ 7 = 27.473

Reorder Point, RP = D X T + SS
= 27.473 X 16.5 + 384.62 = 837.9

(Answer may vary by a few units depending on round-off during calculation.)

Question 2:
Determine if an order needs to be placed, and the amount of that order, if the on-hand inventory for each
of the above (Q. 1) 3 SKUs is as indicated below:
a. On-hand inventory is 240. Reorder quantity is 1 pallet containing 160 units.
b. On-hand inventory is 6020. Reorder quantity is 2000.
c. On-hand inventory is 560 units. Reorder quantity is 400.

Solution 2 a:
From Q. 1 a.
Reorder Point, RP = 316
On-hand Inventory, OH = 240
On-order Inventory, OO = 0
So, OH + OO = 240
240 < 316 ; therefore, Q = 160

Solution 2 b:
From Q. 1 b.
Reorder Point, RP = 4950
On-hand Inventory, OH = 6020
On-order Inventory, OO = 0
So, OH + OO = 6020
6020 > 4950 ; therefore, Q = 0

Solution 2 c:
From Q. 1 c.
Reorder Point, RP = 838
On-hand Inventory, OH = 560
On-order Inventory, OO = 0
So, OH + OO = 560
560 < 838 ; therefore, Q = 400

Question 3:
For each of the 3 SKUs express the reorder point in terms of forward coverage.

Solution 3:
a. Reorder Point, RP = 316 DD = 14 So, RP in FDS = 316/14 = 22.6 FDS
b. Reorder Point, RP = 4950 DD = 900 So, RP in FDS = 4950/900 = 5.5 FDS
c. Reorder Point, RP = 838 DD = 27.473 So, RP in FDS = 838/27.47 = 30.5 FDS
Daily Dema = 22

Reorder Poi = D X T + SS
= 22 X 7 + 0 = 154
154

Tracking Signal (TS) = Sum of FE / MAD

500
35
14.28571
Additional Inventory Questions.xls
Question 1:
If annual demand is 12,000 units, the ordering cost is $6 per order and the holding cost is $2.50 per unit per year,
what is the optimal order quantity using the EOQ model?

Solution 1:

2DCo Annual demand, D = 12,000

EOQ =
CH
Ordering cost, Co = $6
= √(2 X 12000 X 6)÷ 2.50 Holding Cost, CH = $2.50
= 240

Question 2:
Using the EOQ model, what is the total ordering cost of inventory given an annual demand of 36,000 units, a cost
per order of $80 and a holding cost per unit per year of $4?

Solution 2: First calculate EOQ:

2DCo Annual demand, D = 36,000

EOQ =
CH
Ordering cost, Co = $80
= √(2 X 36000 X 80)÷ 4 Holding Cost, CH = $4
= 1200

Next determine how many orders per year:

= 36000 ÷ 1200 = 30 orders

So, Total Ordering Cost = 30 X $80 = $2,400

Question 3:
Using the periodic inventory model, and given an average daily demand of 75 units, 10 days between inventory

reviews, 2 days for lead time, 50 units of inventory on hand, a CSL of 95 percent, and a standard deviation of
demand of 8 units, determine the order quantity?

Solution 3:
At CSL 95%, k = 1.65 (from our Table)
Therefore, SS = Service Factor X ST. DEV. Of Demand X √(RT+T)
= 1.65 x 8 x √(10+2)
= 46
Next calculate TSL:
TSL = D X (RT + T) + SS = 75 x 12 + 46 = 946
 Q = TSL - (OH + OO) = 946 - (50 + 0) = 896
Question 4:
Weekly demand for 12” frames at the Frame Shop is 250 units. The standard deviation is 150. The store manager
continuously monitors inventory and currently orders 1,000 frames each time the inventory drops to 600 frames.
The manufacturer currently takes two weeks to fill an order. How much safety inventory does the store carry?

Solution 4:
Here, Q = 1000 (given but not needed)
R = 600
We know that, for a continuous system R = D X (RT + T) + SS
600 = 250 X 2 + SS
So, SS = 600 - 500
= 100

Question 5:
Weekly demand for the iPhone20 at the Cell Phone Shop is 250 units. The standard deviation is 150. The store
manager has decided to follow a periodic review policy to manage inventory of cell phones. They plan to order
every three weeks. The manufacturer currently takes two weeks to fill an order. Given a desired CSL of 95 percent,
how much safety stock should the store carry? What should their TSL be?

Solution 5:
SS = kX σ X √(RT+T) Where, RT = 3
= 1.65 X 150 X √(3+2) T= 2
= 553.4 CSL = 95% So, k = 1.65 (from table)
= 554 σ= 150
D = 250
Next TSL = D X (RT + T) + SS
= 250 X (3 + 2) + 554
= 1804
Reorder Point Exercises with SS.xls
Calculate the statistical safety stock needed and the reorder point (in units and FDS) for the following scenarios:

Stdev of
Desired Daily daily Order
Fill Rate Demand Leadtime demand Quantity
(%) (units) (days) (units) (units)
1 97% 100 6 20 500
2 98% 100 6 20 500
3 99% 100 6 20 500
4 99% 100 6 50 500
5 99% 100 8 50 500
6 99% 100 8 50 2000

DEVELOP YOUR OWN FORMULAS, WITHOUT COPYING FROM SOLUTIONS PAGE.

Solutions:
Stdev of
Desired Daily Order
Leadtime daily
Fill Rate Demand Quantity f(k) k (approx) SS (units) R (units) R (FDS)
(days), T demand
(%) (units) (units), Q
(units)

1 97% 100 6 20 500 0.306186 0.2 10 610 6.1

2 98% 100 6 20 500 0.204124 0.5 25 625 6.3
3 99% 100 6 20 500 0.102062 0.9 45 645 6.5
4 99% 100 6 50 500 0.040825 1.35 166 766 7.7
5 99% 100 8 50 500 0.035355 1.4 198 998 10.0
6 99% 100 8 50 2000 0.141421 0.7 99 899 9.0

Class 98% 12 21 5.7 140 0.107195 0.87 23 275 22.9

Demo

Note: Your columns and Excel formulas may differ; but your results should be very close to the number in column J.
Column I is developed by looking at the Table 7.14 on Page 128 in the Text.
It is possible that your approximate numbers (Col I) might differ slightly.

Formula:
Q X (1-FR)
f(k) =
ST. DEV. of Demand X √T
Safety Stock, SS = Service Factor X ST. DEV. Of Demand X √T
R = Daily Demand X Lead Time + SS
R (FDS) = R (units) / Daily Demand