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Inventory Planning

Using the information listed below (under details) determine the Re-order point (ROP), economic order quantity (EOQ) and how those values are different with the proposed changes to procurement costs. Be sure to include all work so partial credit can be earned. You can submit a spreadsheet and/or document for this assignment.

Assignment Details
Abilene Auto Parts, a retailer of general maintenance and after-market automotive products, desires to re-build their brand around service and availability. Traditionally, they have committed to having parts in stock for their customers 80% of the time. Use the date below to determine:

(a) Their current economic order quantity (using EOQ) [10-points]

(b) Their current re-order point (ROP) using the 80% service level [10-points]

To support the re-branding effort, the VP of marketing at Abilene has asked you to determine the incremental costs of increasing the cycle-service level to 99%. Given the information below regarding replacement headlight bulbs, determine

(c) The difference in TOTAL annual cost of the replacing the 80% policy with one calling for a 99% service level (i.e., the incremental costs asked for by the VP of marketing) [20-points]

(d) The CFO does not want this initiative to increase costs, so the VP of operations would like to know if supply chain improvements can adequately lower costs in support of the branding initiative. If, through these improvements, the average lead time could be reduced to 3 days, the standard deviation of lead time reduced to 1 day, and ordering costs to $30, by how much would this offset (or not) the difference in annual costs of a shift to a 99% service level (calculated in part c)? [60-points]

In other words, is the new scenario (99% service level, 3-day lead time, standard deviation of lead time of 1, and $30 ordering cost) more or less expensive than the baseline case (with an 80% service level)? By how much is it more or less expensive? (Note: you must provide the correct value for full credit on part d.)

Baseline Information:

average daily demand = 10 units/day (store operates 360 days/year)

standard deviation of demand = 3 units/day

average lead time = 6 days

standard deviation of lead time = 2 days

item cost to AAP = $25/unit

annual holding cost = 30% of cost of product

ordering cost = $50/order

cycle-service level = 80%

Sample Solution

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