Economic order quantity - and reorder point
A distributor of large appliances needs to determine the order quantities and reorder points for the various products it carries. The following data refer to a specific refrigerator in its product line:
- Cost to place an order - $100
- Holding cost - 20% of product cost per year
- Cost of refrigerator - $500 each
- Annual demand - 500 refrigerators
- Standard deviation during lead time - 10 refrigerators
- Lead time - 7 days
Consider an even daily demand and a 365-day year.
a) What is the economic order quantity?
b) If the distributor wants a 97 percent service probability, what reorder point, R, should be used?