Example: You are given the followings information in regard to an item:
Annual usage = 20,00 units.
Ordering cost = Rs. 160 per order
Carrying cost = 20 % of the average inventory investment
Unit cost = Rs. 2
Lead time = 10 working days
Total working days = 250 per annum
It is observed from the past date that the demand during lead time has been up to a maximum level of 150 unit per day. Keeping this level in mind what safety stock would you recommend ? also determine :
a. The re order level when the safety stock level suggested by you is kept in stock.
b. Average level of inventory stock help
c. The ordering and carrying costs associated with this fixed order inventory policy .
Solution;
We know safety stock SS = max DDLT - average DDLT
With maximum demand per day = 150 units,
Average demand per day = 20,000/250= 80 units
Lead time = 10 days
We have Maximum DDLT = 150x 10 = 1000units and
Average DDLT = 80x 10 = 800 units
SS = 1500- 800= 700 units
1. Re order level =SS + average DDLT = 700+ 800= 1500 units
2. Average stock level = SS +Q* / 2
Q * = 2x 160x 20, 000/x0.20x2x = 4, 000 units
From the given information
Thus average stock level = 700 + 4000/ 2 = 27 00 units
3. Ordering cost = 20, 000/ 4000 X 160 = Rs. 800
4. Carrying cost = 2700x 0.40= Rs. 10 80
5. Total cost = 800+1080+ =Rs 18880