Chapter 9, Problem 29P

Your firm uses a periodic review system for all SKUs classified, using ABC analysis, as B or C items. Further, it uses a continuous review system for all SKUs classified as A items. The demand for a specific SKU, currently classified as an A item, has been dropping. You have been asked to evaluate the impact of moving the item from continuous review to periodic review. Assume your firm operates 52 weeks per year; the item’s current characteristics are:

$\begin{array}{l}\text{Demand }\left(D\right)=\text{15},0\text{8}0\text{ units/year}\\ \text{Ordering cost }\left(S\right)=\$\text{125}.00\text{/order}\\ \text{Holding cost }\left(H\right)=\$\text{3}.00\text{/unit/year}\\ \text{Lead time }\left(L\right)=\text{5 weeks}\\ \text{Cycle-service level}=\text{95percent}\end{array}$

Demand is normally distributed, with a standard deviation of weekly demand of 64 units.

1. Calculate the item’s EOQ.
2. Use the EOQ to define the parameters of an appropriate continuous review and periodic review system for this item.
3. Which system requires more safety stock and by how much?