Inventory Management

CSU Inc. sells university beer steins. Daily demand is 22 steins. Each stein costs $7.85. Set up costs are $10. The carrying costs are 15%. The company is open 250 days per year. Lead time is 4 days with a standard deviation of 1.6 days. The demand is normally distributed with a standard deviation of 4 steins per day. Desired service level is 97%.

1. What is the economic order quantity (EOQ)?

2. What is the Reordering Point without Safety Stock?

3. What is the Reordering Point with Safety Stock?

4. What are the total costs of inventory with safety stock?

5. Essay:

After you set up your Excel spreadsheet, perform a sensitivity analysis (aka tinker with the numbers). Determine which of the "inputs" (variables such as lead time, service level, standard deviation of demand/lead time, etc.) has the biggest effect on safety stock and total costs of inventory. Explain why this is the case (Hint: Take a very close look at the formula for the standard deviation of demand during lead time; how do the variables influence the outcome?). How would you manage CSU Inc.'s inventory more effectively?