ABC Analysis, EOQ, Reorder Point & Safety Stock

Scenario

You have been tasked to manage the inventory at your company. Your boss thinks that the inventory management is out of control, but he is not sure and wants you to perform some analysis of the inventory and provide him with some data. This chart lists your current stock, annual volumes and unit cost.

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Item Stock Number Annual Volume Unit Cost
13595 9500 $ 2
32514 9000 $10
22010 3800 $650
14851 2400 $330
15242 1800 $500
65248 1400 $90
10252 110 $3,800
23256 1100 $480
16325 950 $920
12564 495 $190
13584 400 $250
12547 190 $220

Complete the steps in each section and then submit your assignment for grading.

Step 1 Conduct an ABC Analysis

Use Excel OM and the chart to conduct an ABC analysis to determine which category each of the parts falls into.

Step 2 Calculate EOQ and Redorder Point

Use Excel OM to calculate the EOQ and the reorder point for part number 13595 (check reorder point and graph when setting up the software).

The lead time to reorder parts is 30 days. The set up/ordering cost is $1,000 per order, and the holding cost is fixed at $125 per month. The factory runs 365 days per year, and the company wants to maintain a safety stock of 5.

Step 3 Calculate safety stock

In Step 2, you were given the safety stock of 5; however, this can be calculated for a more accurate number. Assume that the average daily demand for part number 13595 is 26 with a standard deviation of 2 parts per day. If the company wants to make sure that they do not stockout more than 5% of the time then what level of safety stock should they hold?

To calculate the safety stock, use Excel OM and the Safety Stock (Normal Distribution) spreadsheet. Input your data into column B of the model titled Model: Demand during lead time and its standard deviation given.