Question

A famous department store must decide on the quantity of women’s handbags to procure in Italy. The store estimates that the monthly sales are normally distributed with mean 200 bags and standard deviation 40 bags. The lead time between placing an order and receiving the handbags is 2 months. The department store estimates that the cost of placing an order is £50 and that the inventory holding cost is £1 per bag per month. What inventory model would you recommend to manage the stock of handbags? Using this model, determine when and how many handbags the department store should purchase from its Italian supplier. Clearly state all the assumptions you make.

Answer 1

The inventory model recommended to manage the stock of the handbags is the Economic order quantity model.

To determine how many handbags the department store should purchase from the supplier, the following equation is used

Annual demand = 200 12

Annual demand = 2400

Ordering cost = £50

Holding cost = £1

Economic order quantity   490 units

The number of handbags the department store should purchase from its Italian supplier = 490 units

To calculate when the handbags should be ordered, we make the following assumption

• The required service level is 95%

Using the above assumptions, we can calculate the reorder point.

ROP = ( Mean demand x lead time ) + Z

Z = 1.65 ( 95% service level)

= ​

=

= 56.57

Reorder point = ( 200 x 2 ) + 1.65 x 56.57

Reorder point = 493 handbags

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