Inventory Management and Ordering Policy Analysis

Question 1

The mixed rice stall in SUSS food court uses disposable plastic containers for takeaway orders. The stall operates year-round except on Sundays and public holidays, takes one-week closures each during Chinese New Year and Christmas, and runs half-days on Saturdays. It employs a reorder-point policy to decide when to place orders with its supplier. The containers come in packets of 100, each packet costing $12.75. Historical records show that average annual demand is 200,250 containers, with a standard deviation of 6,560 containers. The annual holding cost is 25% of unit cost, and a transportation cost of $5.80 is incurred whenever an order is placed, and it takes 4 workweeks to receive the items. Inventory records indicate 19,000 containers on hand and no outstanding orders.

(a) Ignoring demand variability, the manager computes the Economic Order Quantity and sets the reorder point based solely on average demand. Explain how ignoring demand variability affects the Economic Order Quantity, and state whether an order should be placed at the next review given the current on-hand inventory. You may assume all public holidays fall on weekdays.

(b) The manager later realised that ignoring the uncertainty in demand might be a mistake and there could be occasions when the stall could not sell the food because of a lack of containers. The manager now decides to include demand uncertainty into the ordering policy and wants to provide a service level of 95%.

Solve for the best ordering policy for the stall. Decide whether an order should be placed now based on the new policy. Do you need to make any assumptions for this analysis?

(c) The manager is considering a periodic review policy with weekly reviews every Monday morning. Analyse the safety stock and the target stock level under this policy and calculate how many packets should be ordered if reviewed now.

Question 2

You have played the Monsoon SIM Inventory Game with an objective to maximise your profit by selling different types of juices at various locations. Describe, in brief, your inventory strategy for the game. Relate the inventory concepts and models learnt in this course and discuss what you would have done differently to improve your performance in the game. State the assumptions required for your analysis. You may include any statistics from the game for your analysis. Mention any limitations the game has.

Operations Management Answers: Expert Answers on Above Inventory Management Questions

Effect of Ignoring Demand Variability

As the demand variability is ignored in calculating the economic order quantity, and the reorder point is considered solely on the basis of average demand, the effect of such ignorance on EOQ itself is negligible. This is mainly because EOQ depends on annual demand and cost. As the reorder point is set up using the average demand, it leads to underestimation of the needed buffer and there are possibilities of risks in terms of stock out.
As the current stock is 19000 and there are no outstanding orders, the re-ordering point ignoring validity is calculated at 15404 which is less than 19000. This indicates that there is no need to place an order now.

Include demand uncertainty; target 95% service level

The calculation of mean lead time demand + safety stock is essential to determine whether the order decisions should be placed or not. The calculation as included in the appendix indicates mean lead time demand + safety stock as 18397, whereas the in-hand inventory is 19000 already, so there is no need to place an order now under the 95% service level policy. 

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