You have taken a job with Widget Co. in their Supply Chain Management Group. The VP of the group has asked you to take a look into one of their class C level items (SKU #12CD45F) . Please be clear as to what approaches you have taken and assumptions that you have made. Also, be sure to submit a spreadsheet or additional appendices with any of your calculations for this problem as well.

1.What is the estimated total annual ordering, holding, and shortage costs on SKU #12CD45F under the current inventory policy?

2.What is the estimated fill rate?

3.What order quantity and reorder point do you suggest?

4.If your recommendations for Q and R differ from current company practice how would you justify the change? Be specific. PS: if your recommendation to part C. does not differ from the current practice of the firm, go back and rethink your answer...

Here is the detailed information that you have gleaned by talking to the inventory manager of this part:

SKU #12CD45F is managed in a physical distribution system considering both Cycle Stock and Safety Stock. Demand for the item is random but stationary and non-seasonal at a rate of 36,500 units per year. Forecasted lead time demand is about 600 units. Our demand forecasting algorithm has been generating forecast RMSE of 300 units for this item. Lead time usage forecast errors can be assumed to be approximately normally distributed. All demands which occur during a system stockout become backorders. The policy on Class "C" items is to set an order quantity equal to 25% of annual demand (i.e., order four times per year) and to set a reorder point equal to 150% of expected leadtime demand. There are about, by the inventory manager's estimate, about 400 other Class C parts that are similar to SKU #12CD45F that Widget Co supports. The current VP of Supply Chain established the company's Class C inventory policy when she was an inventory manager for that product line.

SKU #12CD45F has a purchase cost of $40.00 per unit, and we sell it to our 7 top tier customers (75% of the total volume) at a price of $60.00 per unit and our second tier customers (25% of the total volume) at $64.00 per unit. Our system ordering costs are $200 per order placed, and our inventory holding costs are 12% annually. The firm is unsure about the exact cost of backorders, but they generally agree that it's at least $5.00 per unit, and that it is surely no more than $10 per unit backordered. Our vendor charges us for delivery of the item to our stockage point at a rate of $4.00 per unit, plus a fixed drop-off charge of $28.25 per delivery.