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QUESTION

# Case 7.4 Maximart Sales The inventory manager of Maximart Sales wants to establish optimum ordering policies.

Case 7.4                                Maximart Sales

The inventory manager of Maximart Sales wants to establish optimum ordering policies. Weekly demand for a particular item follows a normal distribution with a mean of 300 units and a standard deviation of 70 units. The supplier will sell Maximart up to 999 units in an order at a price of \$100/unit. If Maximart orders between 1000 and 3999 units per order, they can get the product for \$95/unit. If Maximart is willing to order 4000 or more units with each order, they can get the product at \$90/unit. Maximart sells the item for \$200 per unit.

It costs Maximart \$125 to place an order, and \$0.60 to hold a unit of inventory from one week to the next. The lead time between placing an order and receiving it, inspected and ready for sale, is two weeks.

When demand cannot be satisfied from stock, some customers are willing to accept back order, and wait another week or two for delivery. Other customers will not wait. The percentage of customers who are willing to accept a backorder varies uniformly between 10% and 50%. Maximart estimates that they will lose \$60 in future profit from each lost sale.

The current inventory policy is an order quantity of 4000 units, to take advantage of the quantity discounts. Further, the inventory manager has also set the reorder point at the average weekly demand, 300 units. An order will be placed in any week for which the ending inventory is less than the reorder point, provided that there is not already an outstanding order from the previous week.

a.        Simulate 40 weeks of operation. Assume that the inventory at the beginning of    week 1 is 1000 units. Provide a breakdown of the average net profit and the          average weekly costs for ordering, holding, lost future profits, and average total           weekly costs.

b.        Repeat part a. with an order quantity of 1000 units and a reorder point of 700       units.

c.        Using the results from part a. and b. investigate a couple other combinations of    reorder point and order quantity, in an attempt to determine the combination of        the two that will lead to the greatest profit. Report your recommendations.