Maximart Sales

The inventory manager of Maximart Sales wants to establish optimum ordering policy. Weekly demand for a particular item (one of many Maximart handles) follows a normal distribution with a mean of 300 units and a standard deviation of 70 units. The supplier sells at the following schedule for volume discounts:

Order quantity, units         1-999              1,000-3,999               4,000 or more

Price, P/unit                         5,000                   4,750                          4,500

It costs P6,250 to place an order and P30 to hold a unit in inventory for 1 week. The lead time between placing an order and receiving it, inspected and ready for use, varies from one order to the next. Most orders take 2 weeks from the time of ordering until they’re received and available for use. However, 30% of the orders take 3 weeks, and 10% take only 1 week.

When demand cannot be satisfied from stock, some customers are willing to back order and wait another week or two for delivery – but many others are not. The percentage of customers who are unwilling to wait for delivery varies between 50% and 90%, with any percentage in between equally likely. The company estimates it loses P5,250 profit for a lost sale.

An order will be placed on any week for which the ending inventory is equal to or less than the reorder point, provided that the amount already ordered but not yet received is not more than twice the reorder point, i.e., provided there are no more than two outstanding orders.

Assuming that the inventory at the beginning of the first week is 1,000 units, simulate 200 weeks of operation. Use your model to investigate the average total weekly cost of different order sizes and reorder points.