Ms. Patel wants to evaluate the store’s inventory policy for automotive engine coolant. This SKU has an average daily demand of 20 cases and yields a net profit of $25 per case. The cost of holding inventory is $0.002 per case per day, charged on the day-ending inventory count.
The inventory replenishment process works as follows: Whenever the inventory level falls to r cases (reorder point) or below, the manager issues an order to the supplier for q cases (the reorder quantity). The administrative cost of placing and handling an order is estimated in $50, regardless of the order size. The supplier is very reliable and delivers orders on the fifth day, even on weekends and holidays.
As daily demand for this product is subject to uncertainty, Ami decided to analyze historic information and concluded that demand is distributed according to a normal distribution with a mean of 20 cases per day and a standard deviation of 6.2 cases per day.
The inventory level for this SKU on the first day of the year is 150 cases. Ami wants to evaluate the financial impact of ordering 250 cases whenever inventory levels go under 75 cases.
Ami has requested your expert advice to create a Monte Carlo simulation model that she can use to test different replenishment policies for this product.
Use the information obtained from the simulation conducted for the operation considering these three inventory replenishment policies:
A. Order 250 units when inventory levels go under 75 units (current)
B. Order 350 units when inventory levels go under 75 units
C. Order 350 units when inventory levels go under 100 units
Prepare a business document/letter addressed to your client describing the opportunity, listing assumptions made, describing the process employed, and presenting your recommendation on the inventory replenishment policy to adopt.
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