Question

Provide a detailed outline of the steps involved in the inventory management process for Sam's Pet Hotel, considering its continuous review system and the purchase of kitty litter at $11.50 per bag. Utilize the available information on inventory usage and lead time to demonstrate the calculation of key inventory control parameters, such as reorder point and order quantity, to ensure smooth operations and adequate stock levels."

a) Compute the daily usage rate of kitty litter and the reorder point to maintain sufficient inventory levels for Sam's Pet Hotel
b) Determine the economic order quantity (EOQ) and the optimal order size for kitty litter to minimize inventory holding costs and stockouts
c) Calculate the safety stock level required to account for demand variability and lead time fluctuations in the continuous review inventory system of the pet hotel
d) Evaluate the total inventory holding costs and ordering costs associated with managing the inventory of kitty litter over the course of a year for Sam's Pet Hotel.

Answer 1

Effective inventory management for Sam's Pet Hotel involves calculating daily usage rates, reorder points, EOQ, and safety stock levels, as well as evaluating total inventory holding and ordering costs to ensure smooth operations with sufficient stock levels of kitty litter.

Step-by-step explanation:

Inventory Management Process for Sam's Pet Hotel

Effective inventory management is crucial for the smooth operation of Sam's Pet Hotel. To manage the inventory of kitty litter, several key parameters such as the daily usage rate, reorder point, economic order quantity (EOQ), safety stock, and total inventory holding and ordering costs need to be calculated.

a) Daily Usage Rate and Reorder Point Calculation

To calculate the daily usage rate of kitty litter, we need data on the total usage over a specific period. The reorder point is then determined by the formula: Reorder Point = Daily Usage Rate × Lead Time. For instance, if the pet hotel uses 10 bags daily and has a lead time of 5 days, the reorder point would be 50 bags.

b) Determining the Economic Order Quantity (EOQ)

The EOQ formula is used to calculate the most cost-effective order size that minimizes the sum of holding costs, ordering costs, and stockouts. EOQ is computed using the formula:
EOQ = √((2 × Demand × Ordering Cost) ÷ Holding Cost). The demand refers to the annual requirement of the product, ordering cost is the cost of placing an order, and holding cost is the cost to hold one unit of inventory for a year.

c) Safety Stock Level Calculation

Safety stock ensures that Sam's Pet Hotel has enough kitty litter to cover unexpected demand or delays in delivery. Safety stock can be calculated based on the variation in daily usage and lead time, using statistical methods.

d) Total Inventory Holding Costs and Ordering Costs Evaluation

To evaluate the annual costs associated with managing the inventory of kitty litter, both inventory holding costs and ordering costs must be considered. The holding cost might involve the cost of storage space, insurance, and any other related expenses. Ordering costs include the costs associated with placing and receiving orders. These costs can be combined to find the total cost implication for the pet hotel.