Question

1. What are the six assumptions of the EOQ model?

2. Average daily demand for a product is normally distributed with a mean of 25 units and a standard deviation of 4 units. Lead time is fixed at 20 days. What reorder point provides for a service level of 95 percent (z=1.65)?

Answer 1

1. SIX ASSUMPTIONS OF EOQ
1. Demand is known and constant.
2. Holding cost is known and does not change.
3. Ordering cost remains the same with each successive order.
4. The price of inventory remains constant throughout.
5. Lead time is 0, and replenishment is immediate.
6. Restocks are made in batches, and the entire order is not ordered until we have even a single unit remaining in our inventory.

2. Mean demand = 25
Standard Deviation = 4
Service level = 95
The z value which corresponds to 95% service level is 1.65
Lead time = 20

To find the reorder point, we will use the following formula:

ROP = DEMAND + SAFETY STOCK
REORDER POINT = DEMAND DURING LEAD TIME + Z * STANDARD DEVIATION * SQRT(LEAD TIME)

= ROP = 25 * 20 + (1.65 * 4 * SQRT( 20)) = 530

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