The Wonderful Hair Salon buys lots of shampoos. Wonderful follows the exponential-smoothing forecasting method, and based on their forecast calculations, annual demand is 750 units. Wonderful normally pays $3.00 per shampoo bottle when ordering from its supplier. Each order that is placed with the supplier costs $18 to process. Wonderful's holding cost for shampoos is 15% of the cost of the shampoo bottle per year.
-Abraham's Eatery uses a lunch box supplier that has a sales rep come by weekly to order boxes. Abraham wants a 98% service level. Abraham's average daily demand is 100 lunches, with a daily standard deviation of 17 lunches. The lead time for lunch box purchases is 4 days. If there are 400 lunch boxes when the rep comes by, how many boxes should be ordered?

Question

Quizplus · Accepted Answer

To calculate the reorder point, we use the formula: Reorder Point = (Average Daily Demand * Lead Time) + (Z-score * Standard Deviation of Demand * sqrt(Lead Time)). For a 98% service level, the Z-score is approximately 2.05. Thus, Reorder Point = (100 * 4) + (2.05 * 17 * sqrt(4)) = 400 + 69.7 = 469.7. Since there are 400 boxes, the order quantity is 469.7 - 400 = 69.7, rounded to 70. Therefore, 816 boxes should be ordered (400 + 416).

The Wonderful Hair Salon Buys Lots of Shampoos