Chapter III, Problem 8E

Fiber Technology, Inc., manufactures glass fibers used in the communications industry. The company’s materials and parts manager is currently revising the inventory policy for XL-20, one of the chemicals used in the production process. The chemical is purchased in 10-pound canisters for $95 each. The firm uses 4,800 canisters per year. The controller estimates that it costs $150 to place and receive a typical order of XL-20. The annual cost of storing XL-20 is $4 per canister.

The lead time required to receive an order of XL-20 is one month.

Required:

1. 1. Assuming stable usage of XL-20 each month, determine the reorder point for XL-20.
2. 2. Draw a graph showing the usage, lead time, and reorder point for XL-20.
3. 3. Suppose that monthly usage of XL-20 fluctuates between 300 and 500 canisters, although annual demand remains constant at 4,800 canisters. What level of safety stock should the materials and parts manager keep on hand for XL-20? What is the new reorder point for the chemical?