Question: Cassorla's Clothes sells a large number of white dress shirts. The shirts, which bear the store label, are shipped from a manufacturer in New York City. Hy Cassorla, the proprietor, says, "I want to be sure that I never run out of dress shirts. I always try to keep at least a two months' supply in stock. When my inventory drops below that level, I order another two-month supply. I've been using that method for 20 years, and it works." The shirts cost $6 each and sell for $15 each. The cost of processing an order and receiving new goods amounts to $80, and it takes three weeks to receive a shipment. Monthly demand is approximately normally distributed with mean 120 and standard deviation 32. Assume a 20 percent annual interest rate for computing the holding cost.

a. What value of Q and R is Hy Cassorla using to control the inventory of white dress shirts?

b. What fill rate (Type 2 service level) is being achieved with the current policy?

c. Based on a 99 percent fill rate criterion, determine the optimal values of Q and R that he should be using. (Assume four weeks in a month for your calculations.)

d. Determine the difference in the average annual holding and setup costs between the policies in parts (b) and (c).

e. Estimate how much time would be required to pay for a $25,000 inventory control system, assuming that the dress shirts represent 5 percent of Hy's annual business and that similar savings could be realized on the other items as well.