To create an effective inventory management system for an item demanded for 50 weeks a year, we'll implement a continuous review system using the Economic Order Quantity (EOQ) model and a reorder point (ROP).
How to explain
With a demand of 50 weeks per year and a lead time of 2 weeks, we calculate the EOQ to optimize order quantity while minimizing holding and ordering costs.
Considering a 95% service level, a safety stock can be determined to meet unexpected demand fluctuations. The reorder point will be set to ensure that when the inventory level reaches a specific point, an order is placed to replenish stock, typically at the EOQ quantity.
By maintaining a continuous review system, we aim to minimize stockouts while optimizing inventory levels, reducing holding costs, and meeting customer demand efficiently.
The Complete Question
Design an inventory management system based on the given information that an item is demanded for 50 weeks a year. Develop a system that includes parameters for inventory control, such as reorder point, order quantity, lead time, and safety stock, considering a continuous demand throughout the year.
Parameters:
Demand: 50 weeks per year
Lead Time: 2 weeks
Desired Service Level: 95%
Order Cycle: 4 weeks
Cost of Holding Inventory: $2 per unit per year
Cost of Placing an Order: $50 per order