Family Application specialises in selling major appliances for use in kitchen remodelling. One of its more popular items is the SubZero refrigerator. Over the past 40 weeks, the store has collected data regarding the weekly demand for this refrigerator. On the basis of these data, the following demand distribution has been estimated:
The store's policy is to reorder up to 15 refrigerators whenever the inventory on hand
Weekly Demand Probability
reaches five or fewer at the end of a week. The holding cost for each refrigerator is $2 per week, and the cost of reordering is $50. If a customer wants a SubZero refrigerator and Family is out of stock, the customer will go elsewhere and the sale is lost. The company estimates that it suffers a goodwill cost of $40 for each lost sale.
Current inventory is seven refrigerators. Lead time for delivery can be described by the following distribution:
Lead Time Probability
1 week 0.3
2 weeks 0.5
3 weeks 0.2
(a) Conduct a 10-week simulation of Family's inventory situation regarding the SubZero refrigerator to determine the total cost for this period. Use random number generator of Microsoft Excel to determine the weekly demand and to determine the lead time.
(b) SubZero is offering Family a new policy of automatically delivering five refrigerators every two weeks. Conduct a 10-week simulation of Family's inventory situation under this plan and determine the total cost for the 10-week period.
(c) On the basis of your answers to part (a) and (b), what would you recommend to Family management regarding the supplier's offer?