Question

A local supermarket sells a popular brand of shampoo at a fairly steady rate of 380 bottles per month. The cost of each bottle to the supermarket is 45 cents, and the cost of placing an order has been estimated at $8.50. Assume that holding costs are based on a 25 percent annual interest rate. Stock-outs of the shampoo are not allowed.

(a) Determine the optimal lot size the supermarket should order and the time between placements of orders for this product.
(b) If the procurement lead time is two months, find the reorder point based on the on-hand inventory.

Answer 1

annual demand = 380 * 12 = 4,560

order cost = $8.50

annual holding cost = $0.45 * 25% = $0.1125

EOQ = √[(2 * 4,560 * $8.50) / $0.1125] = 830.10 ≈ 830 units

time between placement of orders = 830 units / 4,560 units = 0.182 years = 2.18 months

reorder point = 4,560 units * 2/12 (lead time) = 760 units

A new order should be placed when the inventory level is 760 units