Question:

ABC company produces a line of internal Winchester disks for PCs. The drives uses a 3.5 inch platter from an outside supplier. Demand data and sales forecasts indicates that weekly demand for the platters seems to be closely approximated by a normal distribution with mean 24 and standard deviation of 17. The platters require a three week lead time for receipt. ABC company has been using a 40 percent annual interest charge to compute the holding costs. The platters cost &18.80 each. Order cost is $75. The cycle stock is identified using EOQ policy.

a) Purchasing manger is currently reordering whenever the inventory on hand is equal to twice as much as the safety stock level. Calculate the reorder point and achieved fill rate in this policy.

b) Comment on the appropriateness of the method for setting reorder point in a). How is the product availability affected by this rule.

c) ABC company's president decides not to carry any safety stock as a new policy. How should the purchasing manager readjust the ordering policy in order to achieve the same fill rate achieved by the policy in a).

d) Compare the average inventory levels for both cases.