1. What is the ordering cost?

2. Assuming that the lead time data sample (LT.xls) in your possession is large enough, determine whether the lead time is normally distributed or not.

3. Calculate the current annual total inventory cost under the company’s current policy.

4. Which model should be used to find the best inventory policy? Justify your answer.

5. Determine the optimal order quantity. 6. How much safety stock is recommended for the company to carry?

7. State the optimal inventory policy.

8. What is the optimal total annual inventory cost?

9. How much savings does the Company achieve by implementing the optimal policy?

The Northern Appliance Company (NAC) assembles refrigerators for the domestic market. The compressor units used in the model F70 refrigerator are purchased from international suppliers. An analysis of the purchasing operation shows that approximately 2.5 hours are required to process a purchase order, regardless of the quantity purchased. Salaries in the Purchasing Department average OMR 12 per hour, including employee benefits. In addition, a detailed analysis of 30 previous purchase orders showed that OMR 388 was spent on telephone, paper, and other consumables directly related to the ordering process. Also, the company’s financial analysts established a holding cost of 19%. The annual demand for the compressors is 16,200 units, and the assembly plant operates 280 days per year. The lead time for the compressors is variable. Data for lead times from the past 70 orders is provided in the file LT.xls. Currently, the company has a contract to purchase the compressors from the supplier at a cost of OMR 42 per unit, and it is using a policy of replenishing its inventory of compressors once a month. Service level guidelines indicate that 0.5 stockouts per year is acceptable.