The So's Hobby Shop carries a line of radio-controlled model racing cars. Average daily demand for the model cars is 100 with a standard deviation of 30. Unit inventory holding cost is estimated at $0.90/year. The shop purchases the model cars from one supplier. It is estimated that the ordering cost is $100 per order. The delivery lead time is 10 working days. Mr. So decides to use a Reorder Point System to control the inventory of the model cars and wants to achieve a service level of 90%. Assume 300 working days per year.

a)     (3 points) Determine the optimal reorder point R and order quantity EOQ. (Hint: R = average demand during lead time + safety stock)

b)    (3 points) Using the R and Q determined in part a), what is the average inventory in the shop? (Hint: average inventory = EOQ/2 + safety stock)

c)     (4 points) Mr. So is considering a new supplier who can deliver the same line of model cars with a perfectly reliable lead time of only 3 working days. Estimate the potential annual savings in inventory holding cost by switching to this new supplier. (Hint: the saving = holding cost * reduction of average inventory)

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