# Service Level

The Omega Appliance Company assembles refrigerators for export, and the compressor units used in the model C6 refrigerator are purchased from international suppliers. An analysis of the purchasing operation shows that approximately 1.5 hours are required to process a purchase order, regardless of the quantity purchased. Salaries in the purchasing Department average OMR 20 per hour, including employee benefits. In addition, a detailed analysis of 30 previous purchase orders showed that OMR 434 was spent on telephone, paper, and other consumables directly related to the ordering process. Also, the company’s financial analysts established a holding cost of 22%.
The annual demand for the compressors is constant at 7700 units, and the assembly plant operates 350 days per year. The lead time for the compressors is variable. Data for lead times from the past 55 orders is provided in the file LT.xls. Currently, the company has a contract to purchase the compressors from the supplier at a cost of OMR 38 per unit, and it is using a policy of replenishing its inventory with order quantities of 750 compressors. Service level guidelines indicate that 0.5 stockouts per year is acceptable.
Part A
1. What is the ordering cost?
2. Assuming that the lead time data sample (LT.xls) in your possession is large enough, determine whether the lead time is normally distributed or not.
3. Calculate the current annual total inventory cost under the company’s current policy.
4. What is the company’s current service level?
5. Which model should be used to find the best inventory policy? Justify your answer.
6. Determine the optimal order quantity.
7. How much safety stock is recommended for the company to carry?
8. State the optimal inventory policy.
9. What is the total annual inventory cost?
10. How much savings does the Company achieve by implementing the optimal policy?
11. The most recent order for compressors has been placed on Sunday April 22, 2018 at 8:00a.m. What is the probability that the order will not have arrived by the end of Friday April 27, 2018?
12. The Omega Company is considering moving their business to a new compressor supplier. This new supplier offers the following pricing schedule.
Should the Omega Appliance Company switch to the new supplier? Justify your response based on total costs.

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