A catfish bait manufacturer uses a secret blend of ingredients to make their infamous bait. One of these ingredients, we'll call it X for proprietary reasons, is the major component in the mixture. X is ordered in 55 gallon barrels from out of state and is used at the rate of 800 barrels per year. Each order that is placed with the supplier costs $45 to process.
Storage space is at a premium on the manufacturing floor and out in the yard, so their annual cost to hold inventory is $80 per barrel. The owner's brother-in-law provides transportation services and his record has been less than stellar, so lead time has averaged 6 days with a standard deviation of 3 days.
Stopping the process would be disastrous, so the plant manager has set a 99% service level on the reorder point.
1. What is the best order quantity?
2. What is the total cost at this reorder point?
3. What is the reorder point?
4. What is the cost of holding this safety stock?