Inventory Deviation

Inventory Decision Making with Variation in Demand and Lead Time

Solution to Session 5: Individual Case Study

Solution:

  | Year | 14 days | Daily | 4 days |

Demand (t) | 50,000 | 2,000 | 142.9 | 571.4 |

Variation |   | 300 | 80.2 | 160.4 |

Demand Variation:

Bi-weekly Demand = Order quantity = 25 car lots = 25 x 80 = 2000 t

SD of demand = 300 t.

Desired level of protection against stock-out = 98.5%

From the normal distribution table: 98.5% is at 2.17 Standard deviations

SS = 651t

Carrying Cost = 25% or $100 per tonne per year

Inventory cost:

Working stock: 0.5 x 2000 t = 1000T

Carrying Cost working stock = 1000t x $400 x 0.25 = $100,000

Carrying Cost SS = 651 x $400 x 0.25 = $65,100.00

Total Carrying Cost = $165,100.00

Freight rate savings = $5 x 50,000 = $250,000.00

Net Savings: Freight Savings – Carrying Costs = $250,000 – 165,100 = $84,900.00

Inventory Decision Making with Variation in Demand and Lead Time

Solution to Session 5: Individual Case Study

Solution:

  | Year | 14 days | Daily | 4 days |

Demand (t) | 50,000 | 2,000 | 142.9 | 571.4 |

Variation |   | 300 | 80.2 | 160.4 |

Lead Time Variation:

Bi-weekly Demand = Order quantity = 25 car lots = 25 x 80 = 2000 t

LD = 5 days

SDLT = 2 days

SD of demand 4 days = 160.4 t.

Desired level of protection against stock-out = 98.5%

From the normal distribution table: 98.5% is at 2.17 Standard deviations

SS = 651t

Carrying Cost = 25% or $100 per tonne per year

SDL = SDLT x Daily Demand = 2 x 142.9 = 285.80

SDD+L = Sqrt (SDL + SDD)

SDD+L = Sqrt (285.82+160.42) = 327.66

ROP = 160.4 + 327.66 = 488

Inventory cost:

Working stock: 0.5 x 2000 t = 1000T

Carrying Cost working stock = 1000t x $400 x 0.25 = $100,000

Carrying Cost SS = 651 x $400 x 0.25 = $65,100.00

Total Carrying Cost = $165,100.00

Freight rate savings = $4.5 x 50,000 = $225,000.00

Net Savings: Freight Savings – Carrying Costs = $225,000 – 165,100 = $59,900.00