J and G Distributors

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J&G Distributors – Case Analysis |

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PART #4915082 – An Inexpensive Part

Annual Demand = 60, 000 units

Demand rate during the lead time (D) = 2400 units in 2 weeks

Lead Time (LT) = 2 weeks

Probability of demand greater than 2400 units during the lead time = 0.5

S. No. | Expected Deviation (Ei) | Probability of occurrence, (Pi) | Expected ValueEi2 * Pi |

1 | 500 | = 0.5 * 0.5 = 0.25 | 62500 |

2 | 750 | = 0.5 * 0.25 = 0.125 | 70312.5 |

3 | 1000 | = 0.5* 0.15 = 0.075 | 75000 |

4 | 1200 | = 0.5 * 0.1 = 0.05 | 72000 |

SD = 528.9731

Safety Stock (SS)

= z*SD*LT

= 1.65 * 528.9731 * 1 (z corresponding to a service level of 95% is 1.65)

= 873 units

Reorder point (R)

= D*LT+z*SD*LT

= 2400*1 + 872.81 (LT is considered to be 1 because D=2400 and variations are considered w.r.t the entire Lead time)

= 3273 units

Economic Order Quantity, Q*

= 2*D*CoCh

= (2*60000*10)(0.25*0.12)

= 6325 units

Average inventory = (Q*/2) + Safety Stock = (3163 + 873) units = 4036 units

OBSERVATIONS

* The company is currently carrying an excess average inventory = 6515 – 4036 = 2479 units, which is increasing the holding cost also.

Excess Holding Cost

* There is a trade off between the level of service and the inventory. A high level of service (say 99%) calls for higher inventory stock which increases the Reorder point and the inventory holding cost. The increased Reorder point will lead to more frequent orders which will lead to more ordering cost.

* The value of service is judged by percentage of products available on the shelf and the percentage of orders shipped as soon as the order is received. If the company wants to increase the percentage of products available on the shelf, then it has to keep the inventory of the parts which it is not carrying now. These parts may be non- frequently moving parts. Keeping these parts will lead to tying up of capital for a longer period of time, which...