D

Annual Demand

S

Fixed (setup) cost of placing orders

C

Procurement cost per unit

H

Holding cost per unit per year, often given as a % of purchase cost

Q

Order Quantity

R

Reorder point

L

Lead time

Annual Ordering Cost

D/Q)×S

Orders per year

D/Q

Annual Holding Cost

(Q/2)×H

Avg. Inventory or Cycle Inventory

Q/2

Annual Procurement Cost

C x D

Total Annual Relevant Cost

(D/Q)×S+(Q/2)×H

Total Annual Cost

(D/Q)×S+(Q/2)×H+C×D

Time Between Orders

Q/D

Flow Time = Average Time a Unit Stays in Inventory

0.5×(Q/D)

In a continuous review (R,Q) inventory management system what do the values of R and Q define?

Whenever inventory drops to reorder point, R, the system orders quantity, Q.

In a continuous review system, the __________ is fixed while the _________ varies due to random demand during the lead time.

Order quantity; time between orders

Suppose the weekly demand for a case of diapers from a Walmart distribution center (DC) is normally distributed with a mean of D = 500 units and a standard deviation of 90 units. The replenishment lead time to receive more units at the DC is L=2 weeks. Walmart would like to maintain a 90% service level for this product. The procurement cost is $250 per unit, and the holding cost is 30% of the procurement cost per unit per year. Mean Lead Time Demand

D*L=500*2

Suppose the weekly demand for a case of diapers from a Walmart distribution center (DC) is normally distributed with a mean of D = 500 units and a standard deviation of 90 units. The replenishment lead time to receive more units at the DC is L=2 weeks. Walmart would like to maintain a 90% service level for this product. The procurement cost is $250 per unit, and the holding cost is 30% of the procurement cost per unit per year. Safety Stock for 90% service level

=z*sigma*sqrt(L)=1.282*90*sqrt(2)

Suppose the weekly demand for a case of diapers from a Walmart distribution center (DC) is normally distributed with a mean of D = 500 units and a standard deviation of 90 units. The replenishment lead time to receive more units at the DC is L=2 weeks. Walmart would like to maintain a 90% service level for this product. The procurement cost is $250 per unit, and the holding cost is 30% of the procurement cost per unit per year. Reorder Point for 90% service level

D*L+SS=500*2+1.282*90*sqrt(2)

Suppose the weekly demand for a case of diapers from a Walmart distribution center (DC) is normally distributed with a mean of D = 500 units and a standard deviation of 90 units. The replenishment lead time to receive more units at the DC is L=2 weeks. Walmart would like to maintain a 90% service level for this product. The procurement cost is $250 per unit, and the holding cost is 30% of the procurement cost per unit per year. Annual Holding Cost of Safety Stock

=H*SS=(0.3*250)*1.282*90*sqrt(2)

Ordering Cost

=(D/Q)*S

Cycle Inventory Cost

(Q/2)*H

Safety Stock Holding Cost

(R-D*L)*H

Stockout Cost (assuming backorders)

n(R)*B(D/Q)

How much does Costco spend of overall sales on it’s distribution system?

1.8%

Which of the following is NOT a way that Costco has reduced the fixed time and setup cost associated with inbound and outbound logistics in its distribution system?

Shipping only 15% of its merchandise through its 16 regional depots while shipping the remaining 85% directly to stores.

Which condition must always hold at the optimal order quantity in the EOQ model?

Annual Backorder Cost = Annual Ordering Cost

Which of the following is NOT a key assumption of the Economic Order Quantity (EOQ) model?

Costs such as S, C, and H are dynamic and change over time.

Order quantities near the optimal order quantity in the EOQ model generally:

Do not increase total costs much.