# ABC Analysis, EOQ, Reorder Point &amp;amp;amp; Safety Stock

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### Scenario

You have been tasked to manage the inventory at your company. Your boss thinks that the inventory management is out of control, but he is not sure and wants you to perform some analysis of the inventory and provide him with some data. This chart lists your current stock, annual volumes and unit cost.

Item Stock NumberAnnual VolumeUnit Cost
135959500\$ 2
325149000\$10
220103800\$650
148512400\$330
152421800\$500
652481400\$90
10252110\$3,800
232561100\$480
16325950\$920
12564495\$190
13584400\$250
12547190\$220

Complete the steps in each section and then submit your assignment for grading.

Step 1 Conduct an ABC Analysis

Use Excel OM and the chart to conduct an ABC analysis to determine which category each of the parts falls into.

Step 2 Calculate EOQ and Redorder Point

Use Excel OM to calculate the EOQ and the reorder point for part number 13595 (check reorder point and graph when setting up the software).

The lead time to reorder parts is 30 days. The set up/ordering cost is \$1,000 per order, and the holding cost is fixed at \$125 per month. The factory runs 365 days per year, and the company wants to maintain a safety stock of 5.

Step 3 Calculate safety stock

In Step 2, you were given the safety stock of 5; however, this can be calculated for a more accurate number. Assume that the average daily demand for part number 13595 is 26 with a standard deviation of 2 parts per day. If the company wants to make sure that they do not stockout more than 5% of the time then what level of safety stock should they hold?

To calculate the safety stock, use Excel OM and the Safety Stock (Normal Distribution) spreadsheet. Input your data into column B of the model titled Model: Demand during lead time and its standard deviation given.

Tutorbetie
School: Rice University

Attached.

Running Head: Use of Quality Tools

1

Inventory Management
Institutional Affiliation
Date

Use of Quality Tools

2
ABC Analysis

Pareto analysis is used in decision making through the application of statistical
techniques in the selection of a limited number of problems that produce the significant overall
effect. The analysis uses the Pareto principle which states that doing 20% of the entire part of the
job the generated benefit will be approximately 80% of the entire job. It is also known as the
80/20 rule (Karuppusami & Gandhinathan, 2006).
The idea of the Pareto principle can be used to estimate the major causes of customer
complaints regarding the delay in responding to calls. In this analysis, we shall look at the 80%
of the delays and relate the same percentage to see the possible cause of the call delays. The
Pareto principle will help us coming with a decision since it applies quality control tools that use
statistical analysis (Karuppusami & Gandhinathan, 2006).
The chart below analyses the reasons for delay in call services complains placed by customers.

PARETO DIAGRAM
200

120

180
100

160
140

80

120
100

60

80
40

60
40

20

20
0

0
Operators shortstaffed

Receiving party
not present

Lack of operator
understanding

Total Number

Customer
dominates
conversation

Cumulative count percent

Other reasons

U...

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Review

Anonymous
Good stuff. Would use again.

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