a. New plan
Begin by estimating annual demand and the variability in the demand during the lead time for this first item. Working with the weekly demands for the first 21 weeks of this year and assuming 52 business weeks per year, we find the EOQ as follows:
Weekly demand average = 102 gaskets/week Annual demand (D) = 102(52) = 5304 gaskets Holding cost = $1.85 per gasket per year (or 0.21 0.68 $12.99) Ordering cost = $20 per order
Turning to R, the Normal Distribution appendix shows that a 95% cycle-service level corresponds to a z = 1.65. We then use the EG151 data to find the standard deviation of demand.
Standard deviation in weekly demand () = 2.86 gaskets
Standard deviation in demand during lead time
R = Average demand during the lead time + Safety stock
= 2(102) + 1.65(4.04) = 210.66, or 211 gaskets
b. Cost comparison
After developing their plan, students can compare its annual cost with what would be experienced with current policies.
Holding cost (cycle inventory) 139 314
The total of these two costs for the gasket is reduced by 26 percent (from $846 to $627) per year. The safety stock with the proposed plan may be higher than the current plan, if the reason for the excess back orders is that no safety stock is now being held (inaccurate inventory records or a faulty replenishment system are other explanations). We cannot determine the safety stock level (if any) in the current system. The extra cost of safety stock for the proposed system is minimal, however. Only seven gaskets are being proposed as safety stock, and their annual holding cost is just another $1.85(7) = $12.95.
Surely the lost sales due to back orders are substantial with the current plan and will be much less with the proposed plan. One symptom of such losses is that 11 units are on back order in week 21. A lost sale costs a minimum of $4.16 per