Problem: It is your responsibility, as the new head of the automotive section of Nichols Department Store, to ensure that reorder quantities for the various items have been correctly established. You decide to test on item and choose Michelin tires, XW size 185X14 BSW. A perpetual inventory system has been used, so you examine this as well as other records and come up with the following data:
Cost per tire $35
Holding cost 20 percent of tire cost per year
Demand 1,000 per year
Ordering Cost $20 per order
Standard Deviation of daily demand 3 tires
Delivery lead time 4 days
Because customers generally do not wait for tires but go elsewhere, you decide on a service level of 98 percent. Assume the demand occurs 365 days per year.
Q1. Determine the order quantity
Q2. Determine the reorder point.