Question: 310 suppose you are the director of operations for the...
3.10 Suppose you are the director of operations for the southeast region for consumer electronics retailer BigBuy. You have been asked by the chief operating officer of the company to review the inventory management processes and procedures in place at all BigBuy retail outlets in your region. Accordingly, you have gathered some data from the store managers and regional DC managers.
To begin understanding the stocking processes, you start with a single stock-keeping unit (SKU) at a single retail outlet, a 19-in. LCD computer monitor that is sold at BigBuy's largest store in Raleigh, NC. The data you have collected indicates the following:
• Average demand for this SKU is about 5 units per day, which equates to 1800 units per year on BigBuy's operating schedule of 360 days per year.
• The DC manager indicates that the DC's operating policy specifies next-day fulfillment for all orders placed by retail outlets prior to 6 p.m. on any given day.
• The cost of placing a replenishment order at the retail store is estimated to be $6.25, which covers various administrative functions like entering the day's orders on the Intranet-based ordering system and receiving daily shipments, sorting them, and stocking them in the store room.
• BigBuy's corporate accounting standards specify a 25% inventory holding cost rate for all retail outlets.
• The cost (to BigBuy—i.e., cost on its accounting books) of this 19-in. LCD monitor is $100.
• Since this is a relatively fast-moving item at this store, the current replenishment policy calls for daily (on average) replenishments (i.e., an order quantity of 5 units).
a. Is this a good replenishment policy? What is the annual cost of this replenishment policy?
b. Is the current replenishment policy optimal? If so, why? If not, what needs to change for daily replenishments to be optimal?
3.11 Continuing the scenario described in Question 3.10 earlier, you decide to gather additional data to further explore inventory management processes and procedures at the Raleigh BigBuy store. First, you find that daily demand is, as one would suspect, not constant. The data you gather indicates that mean daily demand is 5 monitors, with a standard deviation of 1.5 monitors, approximately following a normal distribution.
a. Assuming that the DC is able to consistently meet its “next-day” policy, what should the reorder point be in a continuous-review (Q, R) inventory system at the BigBuy store in order to achieve a 90% cycle service level?
b. Relentless in your pursuit of outstanding performance—driven to prove that you deserve to be the next COO—you collect additional data that indicates that the DC is actually not always able to provide next-day fulfillment. The actual performance is an average fulfillment lead time of 1.2 days, with a standard deviation of 0.4 days, approximately following a normal distribution.
c. Given this updated information, what reorder point do you recommend?
d. If BigBuy used the reorder point from (a) above when, in actuality, lead time follows the distribution specified by the data as described earlier, what would be the actual in-stock probability performance (i.e., the cycle service level)?
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