What should be the target inventory at each review period

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Reference no: EM132233943

Problem :

An ophthalmologist’s office operates 52 weeks per year. It purchases disposable contact lenses for $11.70 per pair. The following information is available about these lenses.

Demand = 90 pairs/week

Order cost = $54/order

Annual holding cost = 27% of purchasing cost

Desired cycle-service level = 80%

Lead time = 3 weeks

Standard deviation of weekly demand = 15 pairs

Current on-hand inventory is 320 pairs, with no open orders or backorders.

Part I   Currently, the company uses a continuous review system,

What is the EOQ? What would be the average time between orders (in weeks)?

What should be the safety stock? What should the reorder point be?

An inventory withdrawal of 10 pairs was just made. Is it time to reorder?

The store currently uses a lot size or 500 unites (i.e., Q = 500). What is the annual holding cost of this policy? Annual ordering cost?  

What would be the annual cost saved by shifting from the 500-unit lot size to the EOQ?

Suppose that the weekly demand forecast of 90 pairs is incorrect and actual demand averages only 60 pairs per week. How much higher will total costs be, owing to the distorted EOQ caused by this forecast error?

Suppose that actual demand is 60 pairs but that ordering costs are cut to only $6 by using electronic data interchange to automate order placing. However, the buyer doesn’t tell anyone, and the EOQ isn’t adjusted to reflect this reduction in S. How much higher will total costs be, compared to what they could be if the EOQ were adjusted?

Part II   If the company chooses to review and replenishment inventory every 5 weeks,

a. To achieve the same 80% cycle-service level, how much more safety stock is needed than with the continuous system?

b. What should be the target inventory at each review period?

It’s time for the periodic review. With the current inventory of 320 pairs, how much should be ordered?

Reference no: EM132233943

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