Question

Problem 3

Although your initial calculations were quite precise, you learn that Tegaderm experiences multiple stock-outs in the pharmacy. You have also learned that demand is actually variable; it has a mean of 80 dressings per day, with a daily standard deviation of 10. Additionally, 3M takes longer to ship than expected: it actually takes 10 days to receive an order. Please round to the nearest whole unit (for units, dollars can remain in dollar/cents) for this entire problem. You may ignore the quantity restriction from Problem 2.d in this problem, i.e., Tegaderm can be ordered in any integer number of units.

Note the unit cost of $1.50 per dressing, annual holding cost per unit inventory at 10% of unit cost, and fixed ordering cost of $12 remain the same. The ER also remains open for 365 days per year.

1. Assume the pharmacy uses a continuous review policy. How many units of Tegaderm should each order consist of?
2. Compute the safety stock needed to provide a 95% service level. What is the annual holding cost for holding this safety stock?
3. What should the re-order point be to provide a 95% service level?
4. How much additional safety stock is needed if the service level is increased from 95% to 98%? By how much does the total annual relevant inventory cost rise when the service level is increased from 95% to 98%?

Answer 1

Economic Order Quantity refers to the number of unit the company should add to the inventory and the order is made to minimize the total inventory cost. The assumptions of EOQ are: -

There is no constraint on lot size

holding cost and ordering cost

demand is independent

Lead time is certain

Probum 3 (salution) druasinge Lday drussinga day o days d 80 de LT 10 Cest-160 H=10 x P50 100 40.15/untyery 12 365 days/year dxn 80 x 365 24, 200 deaseinge/year 2 DS H 2x 29200 x 12 O15 2161 units Ausoer 216148 CSLE 95% Z Co.95)- 16 Safelg otock 10 X 10 L'64 52 unils dusuer 51 86 S5 X H Holeding cost 52 x 0.15 7 80 Answer

Rop-(dxLT) + 55 0x10) 52 800 + 52 852 units Ansuey CSL=98% Z-Value 2 06 2 06 /10 x10 65-14 065 uits new Imerase en 4s 55,aus-Seld 65-52 13 unit duex neu Annual holding S5mees H 65X 0015 915 new annual 915 180 cost 95 Antcex