Question

The manager at Pedal to the Medal, a bicycle distributor, utilizes a continuous review policy for inventory management. Currently, the manager places an order for 10,000 bicycle tires when the inventory drops to 6,000. Weekly demand for tires follows a normal distribution with a mean of 2,000 and a standard deviation of 500. The replenishment lead time is two weeks. Each tire costs Pedal to the Medal $40, and the company sells each tire for $80. The company incurs an annual holding cost of 25 percent. How much safety inventory does the company currently carry? Based on the critical ratio, what should the optimal safety stock be?

Answer 1

Safety inventory is calculated by subtracting the reorder point from the maximum inventory level, which in this case is 4,000 tires. Optimal safety stock would be calculated using the critical ratio but requires additional information such as the service level desired.

Step-by-step explanation:

The student's question is about determining the safety inventory held by Pedal to the Medal, a bicycle distributor, and finding out the optimal safety stock based on the critical ratio. The current policy of the manager is to place an order when the inventory level drops to 6,000 tires, and the normal weekly demand has a mean of 2,000 tires with a standard deviation of 500. The lead time for replenishment is two weeks.

To calculate the safety inventory, we subtract the reorder point (ROP) from the maximum level: 10,000 - 6,000 = 4,000 tires. This is the current safety inventory held by the company. To determine the optimal safety stock, we would need to calculate the critical ratio, which would involve using the distribution of demand during lead time and setting an acceptable level of service, which is not provided in the question. With this information, the safety stock could be adjusted to meet the desired service level while balancing the costs of holding inventory against the risks of stockouts.