Memo
To: John Smith, Manager of Purchasing, The Flour Mill
From: Supply Chain Analyst
Date: 10/03/2011
Re: Analysis of potential savings from inventory decision strategies

Dear Mr. Smith,
Let me take this opportunity to thank you once again for allowing me to undertake this critical analysis and be able to apply some of the concepts and techniques I have learned in the university program from which I recently graduated.
This memo is identifying an immediate correction that must be implemented to the company’s order cycle selection. After carefully monitoring stock levels, we have realized that there is a wider fluctuation in the level than previously anticipated. As such, the risk of stocking out is higher than the 1.5% level specified by senior management. This is a result of simultaneous variation from both the lead time and the demand.

Below is the revised calculation of the safety stock required under a variable order cycle:

SDD+L = √(SDD2 + SDL2) = √(SDD2 + (SDLT x dDAILY)2)

300 = √(14/4*SD42) SD4=(300*2)/√(14) SD4=160.3567

This is the standard deviation of demand during the four days of lead time.

SDLT = 1 day dDAILY = 2000/14 = 142.8571

Therefore: SDD+L = √(160.35672 + (1*142.8571)2) = 214.76
In order to maintain a 98.5% service level, we must carry a 2.17 SD of safety stock:
2.17*214.76 = 467 whole units

Scenario 1 (fixed cycle):

Freight rate savings: 50,000 t. x $5/tonne = $250,000
Less: Added costs of safety stock: 651 units x $400/unit x 0.25= $ 65,100

Net saving: $185,900

Scenario 2 (variable cycle):

Freight rate savings: 50,000 t. x $4.50/tonne = $225,000
Less: Added costs of safety stock: 310 units x $400/unit x 0.25= $ 31,000
Revised Cost of safety Stock: 467 units x $400/units x 0.25 = $ 46,700 Net saving: $194,000
Revised Net Saving: $178,300

Based on the