An airline company uses a fixed order size with safety stock system to control inventory of a fast-moving item. The inventory position of the item is tracked continually. The following is relevant information about the item.
Expected annual demand 1920 units per year
Average monthly demand 1920/12 = 160 units per month
Ordering cost $25 per order
Annual holding cost as a fraction of unit value
36 percent
Unit purchase price $20 per unit
Lead time 3 months
Standard deviation of monthly demand 30 units
The manager specifies the probability of no stockout in an inventory cycle to be 96 percent. Demand per month is normally distributed.
a. Suppose Q = EOQ. Determine EOQ and R, the reorder point. Assume that demand in any given month is normally distributed and is independent of demand in other months.
b. What is the safety stock for this item?