Question

A company manages its inventory for a specific item using the periodic review inventory model with 3 days between orders. It is currently time to place an order, and the company notes that there are 220 items on hand. The item to be replenished has a lead time of 7 days with a daily demand of 410 units. The standard deviation of demand during the uncertainty period has been calculated to be 70.

If the company wants to have at least a 90% service level for this item, what should its order quantity be? The z value is 1.28.

Answer 1

To calculate the order quantity in the periodic review inventory model, the company needs to consider the demand during the lead time and the desired service level. In this case, with a lead time of 7 days, a daily demand of 410 units, and a desired 90% service level, the order quantity should be approximately 3372 units.

Step-by-step explanation:

In the periodic review inventory model, the company places orders at fixed time intervals instead of when inventory levels reach a specific point. To calculate the order quantity, we need to consider the demand during the lead time and the desired service level. In this case, the lead time is 7 days and the daily demand is 410 units. The company wants a 90% service level, which corresponds to a z-value of 1.28. To calculate the order quantity, we use the formula: Order Quantity = (Demand during lead time) + (Z-value * Standard Deviation)

Using the given values, the demand during lead time is 7 * 410 = 2870 units. The standard deviation is 70 units. Plugging these values into the formula gives us: Order Quantity = 2870 + (1.28 * 70) = 3371.6 units. Therefore, the company should order approximately 3372 units to achieve the desired service level.