Foster Drugs, Inc., handles a variety of health and beauty aid products. A particular hair conditioner product costs Foster Drugs $2.95 per unit. The annual holding cost rate is 20%. An order-quantity, reorder point inventory model recommends an order quantity of 300 units per order.
a. Lead time is one week and the lead-time demand is normally distributed with a mean of 150 units and a standard deviation of 40 units. What is the reorder point if the firm is willing to tolerate a 1% chance of stock-out on any one cycle?
b. What safety stock and annual safety stock costs are associated with your recommendation in part (a)?
c. The order-quantity, reorder point model requires a continuous review system. Management is considering making a transition to a periodic review system in an attempt to coordinate ordering for many of its products. The demand during the proposed two week review period and the one-week lead-time period is normally distributed with a mean of 450 units and a standard deviation of 70 units. What is the recommended replenishment level for this periodic review system if the firm is willing to tolerate the same 1% chance of stock-out associated with any replenishment decision?
d. What safety stock and annual safety stock costs are associated with your recommendation in part (c)?
e. Compare your answers to parts (b) and (d). The company is seriously considering the periodic review system. Would you support this decision? Explain.
f. Would you tend to favor the continuous review system for more expensive items? For example, assume that the product in the preceding example sold for $295 per unit. Explain.