Hp Case Report

1. Consider the periodic-review, order-up-to model. Consider the air freight option by examining the cost of inventory for all models in Europe, using a 98% service level and the data given in Table 1 of the case. If the lead time is 5 weeks with sea freight and 1 week by air, and if the review period is 1 week because of production cycles at the factory, what savings in average inventory are available? Assume that the marginal production cost is roughly $300 and the selling price is $450. Per unit transportation cost is $10 by sea and $25 by air. Inventory carrying costs are 24% per year.

The following formula were used to arrive at the Safety stock and Average inventory:

Safety stock = k*σl+r

Average inventory = µ*R/2+Safety stock

Shipping

Options Monthly mean Monthly SD Lead time Review Period Service level Zα (0.98) Sigma (L+R) Safety stock Average Inventory

A 42.3 32.4 1.25 0.25 0.98 2.05 39.6817338 81.3475544 86.635

AA 420.2 203.9 1.25 0.25 0.98 2.05 249.725479 511.937233 564.462

AB 15830.1 5624.6 1.25 0.25 0.98 2.05 6888.7 14121.835 16100.598

AQ 2301.2 1168.5 1.25 0.25 0.98 2.05 1431.11438 2933.78448 3221.434

AU 4208 2204.6 1.25 0.25 0.98 2.05 2700.07254 5535.14871 6061.149

AY 306.8 103.1 1.25 0.25 0.98 2.05 126.271196 258.855952 297.206

Total 26331.484

Air

Options Monthly mean Monthly SD Lead time Review Period Service level Zα (0.98) Sigma (L+R) Safety stock Average Inventory

A 42.3 32.4 0.25 0.25 0.98 2.05 22.9102597 46.9660324 52.254

AA 420.2 203.9 0.25 0.25 0.98 2.05 144.179073 295.567099 348.092