Company ABC, a distributor of electrical monitoring equipment, is looking to reduce inventory costs. Hal, the new materials manager, is considering the inventory policy for HS008, a popular device used to monitor and control many environmental conditions in manufacturing settings. Hal has recently discovered that over the last 5+ years since the HS008 was added to the Company ABC product line, the inventory of HS008 has never fallen below 28 units and has often been much higher, even just before the arrival of new shipments. These high inventory levels have provided a 100% service level and very high inventory holding costs for these expensive devices. Hal would like to accept a lower service level (88% during lead time) to reduce holding costs.

The lead time to receive orders from the supplier in Japan has consistently been about two months. Currently, Company ABC has 797 units of HS008 in inventory, and there are currently no outstanding orders for additional inventory. This is the only product that Company ABC orders from this particular supplier. The estimated transaction cost per order placed is $100, and the annual per unit inventory holding cost is considered to be 24% of the purchase price. The supplier offers discounts for large orders. The pricing works as follows:

Order Quantity

Unit Price

Item: HS008

1 299

$500.00

Supplier Location: Japan

300 999

$480.00

Constant Lead Time: 2 Months

1000 +

$470.00

Sales data for the 5+ years that Company ABC has carried the HS008 is given in the Company ABC Sales Data spreadsheet. During the last 4+ years, a new forecasting system has been in use, and forecasts are shown alongside the actual sales data. Also included are future forecasts for the next several months.

While Company ABC has chosen to keep records of sales on a monthly basis (see spreadsheet), this is unrelated to inventory replenishment options. It is very possible to order from the supplier with any frequency desired (e.g., small quantities could be ordered several times per month, or large orders could be placed every few months, etc.). Orders can be placed at any time during a month.

Hal would like you to recommend a continuous review inventory policy for HS008. This new policy will work as follows. Based on the values of Q and R that you determine, when the inventory position falls to R, an order will promptly be placed for Q units.

Determine the order quantity (Q) and reorder point (R) that you would recommend for the next order of HS008.