Lets provide our skills to assist BADS Inc in adding a new p

Let’s provide our skills to assist BADS Inc in adding a new product to their sales.   Recall that we explored their inventory management and sales of food processors in the textbook example.   Now they plan to sell bread making machines from a supplier located in Hungary.   Due to the popularity of fresh, hot bread, their sales department believes that they can sell 27,350 bread machines each year. They want to plan out their inventory strategy. Each order for bread making machines is very time consuming since the orders must be translated from English into Hungarian so the cost for each order placed is $275.

The lead time for orders is 2 months.

It is also important to note that it costs $27 to hold a bread machine for one year.

Sales estimates that the demand, which is normally distributed will have a standard deviation of 1,250.

Determine the reorder points for SLM1 of 75%, 85%, 95% and 99.99%

Solution

Standard deviation of yearly demand ( i.e. 12 months ) = 1250

Lead time for order = 2 months

Therefore , standard deviation of demand during lead time = 1250 x Square root ( 2/ 12 ) = 1250 x 0.4082 = 510.25

Following are the Z values of corresponding service level :

Service level 75 % = NORMSINV ( 0.75) = 0.6744

Service level 85% = NORMSINV ( 0.85) = 1.0364

Service level 95% = NORMSINV ( 0.95) = 1.6448

Service level 99.99% = NORMSINV ( 0.9999) = 3.7190

It is to be noted that safety stock corresponding to any service level

= Z value for the service level x standard deviation of demand during lead time

Therefore,

Safety stock at service level of 75 % = 0.6744 x 510.25 = 344.11 ( 345 rounded to next higher whole number )

Safety stock at service level 85% = 1.0364 x 510.25 = 528.82 ( 529 rounded to next higher whole number )

Safety stock at service level 95% = 1.6448 x 510.25 = 839.25 ( 840 rounded to next higher whole number )

Safety stock at service level 99.99% =3.719 x 510.25 = 1897.61 (1898 rounded to next higher whole number )

Average monthly demand = Annual demand / 12 months = 27350 / 12

It is to be noted that :

Reorder point = Average monthly demand x Lead time (2 months ) + Safety stock

Therefore,

Reorder point at service level of 75 % = ( 27350/12) x 2 + 345= 4558.33 + 345 = 4903.33 ( 4903 rounded to nearest whole number )

Reorder point at service level of 85% = ( 27350/12) x 2 + 529 = 4558.33 + 529 = 5087.33 ( 5087 rounded to nearest whole number )

Reorder point at service level of 95% = ( 27350/12) x 2 + 840 = 4558.33 + 840 = 5398.33 ( 5398 rounded to nearest whole number )

Reorder point at service level of 99.99% = ( 27350/12) x 2 + 1898 = 4558.33 + 1898 = 6456.33 ( 6456 rounded to nearest whole number )