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You are the operations manager of a firm that uses the continuous-review inventory control system (Q system). Suppose the firm operates 52 weeks a year and has the following characteristics for its primary item:

Demand = 25,000 units/year = 480 units / week

Ordering cost = $30/order

Holding cost = $8/unit/year

A) Assuming constant demand and zero-order lead time, what is the economic order quantity (EOQ) for this item?

B) What is the time between orders in terms of weeks based on economic order quantity (EOQ)?

C) What is the total inventory cost (=order cost + holding cost) per year based on the economic order quantity (EOQ)?

Now let’s change the assumptions of demand and order lead time. In addition to the information provided above, you found that demand is not constant and follows a normal distribution with a standard deviation in weekly demand at 100 units. The order lead time is 2 weeks.

D) What safety stock level provides a 95% cycle-service level?

E) What is the reorder point for this item if they use a 95% service level?


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