# Annual Holding Cost

a. Differentiate between Pipeline inventory and buffer inventory. [5 marks]

b. A local store sells toilet paper to people in the surrounding communities. The demand for the toilet paper has been increasing and management needs to ensure that enough rolls are available to meet the increasing demand. The daily demand for the toilet paper is 400 rolls. The store operates 250 days per year. The following information is also available about the product.

The cost of each roll……………………….…..\$2.

Ordering costs………………………………..……\$100 per order

Annual holding costs per unit…………… 10% of the costs per unit

Desired cycle service level …….……………… 95%

Daily demand is normally distributed with a standard deviation of 20 rolls.

95% service level is equivalent to 2 standard deviations i.e. Z = 2

Current on-hand inventory is 1300 units, with no open orders or backorders.

1. Calculate the EOQ? [3 marks] ii.
2. Calculate the number of order placed per year? [2 marks]
3. iii. Calculate the average daily demand. [2 marks]
4. iv. Calculate the average time between orders [2 marks]
5. v. Calculate the ROP? [4 marks]
6. vi. An inventory withdrawal of 100 units was just made. Is it time to reorder given the reorder point? [2 marks]
7. vii. If the store currently uses a lot size of 8000 units, determine the annual holding cost and the annual ordering cost of this policy? [2 marks]
8. viii. What would be the annual cost saved, if any, by shifting from the 8000-unit lot size to the EOQ? [3 marks]

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