dolution

1. This question will have you calculating 2 different EOQ and ROP values and interpreting the results. For both EOQ and ROP, give your final answer in full sock sets (ROUND UP to the next whole number). The specific questions to answer are based in parts a-c. Tips to solve the EOQ and ROP are given below in bullet points.
   1. Calculate EOQ and ROP for FY2020 based on the FY2020 forecast value that you recommended in Question #1.
   2. Calculate the EOQ and ROP based upon actual demand for FY2020
   3. Use the EOQ results from above and the Q that Throx is currently using (given in the case) and determine total inventory costs using 2020 actuals for your Demand (D).
      1. Compare the total inventory costs from the three results and analyze what it shows you.
      2. What if any are the implications of the ROP based on the forecast and Throx current ROP vesus the ROP determined using Actual Demand.

See additional tips below:

• Use a service level of 95% (z=1.65) when calculating the ROP
• For the variance in weekly demand, use the data provided in the table on page 2 of the case with the FY2020 forecast for all approaches.
• Annual Inventory management costs will include the following: Annual Holding Costs, Annual Ordering Costs, and Purchase Cost.

Company Background Information

Throx sells higher-end custom-design socks in three-sock sets (rather than two). The company operates from a small packaging and distribution facility in Richmond, CA from which it ships product to customers. Given the company’s location and focus, 97% of sales are in California, primarily in the major urban areas of the San Francisco bay area, Los Angeles, Sacramento (and last but not least) San Diego. The company sells exclusively via online sales, at an average price of $18/three-sock set, plus shipping costs charged to the customer.

The company currently orders its product from the Chinese sock manufacturer Zhejiang Datang Hosiery Group Co., Ltd in so-called “Sock City.” Socks are shipped via truck to the port of Shanghai, from where they are shipped to the port at Los Angeles-Long Beach via ocean freight. Once offloaded in Los Angeles-Long Beach, the socks are shipped via truck to the Richmond facility. On average, shipment from the manufacturer to the Richmond facility takes 4 weeks. In addition to the transit time required for shipment, the lead time from when an order is placed with the manufacturer to when it is shipped from Zhejiang is 3 weeks. So, the total lead time is considered to be 7 weeks from when Throx places an order until it reaches the Richmond facility. Historically, the standard deviation of lead time has been 1 week.

Product Orders (Demand) Information

The company provides you with the following information for the past two fiscal years:

Demand Characteristic	2019	2020
Annual Demand, sets	26,270	29,975
Average Weekly Demand	505	576
Std Deviation of weekly Demand	126	144

Product Forecasting Information

Throx uses two main forecasting methods based on annual data to predict orders for the following year, a weighted moving average and exponential smoothing. They provide you with the following information about forecasts for FY 2017 through FY2020:

	Actual Demand (Three Sock Sets)	Weighted Moving Average Fcst	Exponential Forecast
2017	18,850	14,500	15,000
2018	22,750	17,060	18,080
2019	26,270	20,805	21,816
2020	29,975	24,472	25,379

Weighted Moving Average uses W_t = 0.6 and W_t-1 =0.3.Wt-2 = .1

Exponential Smoothing uses a = 0.8.

Inventory Management Information

The initial inventory for all sock styles combined at the beginning of FY 2021 is 2,250 units. You also have information on current costs, which includes:

• Order cost to Throx for an order placed with its current supplier, $/order = S = $225
• Holding cost per set per per year = H = $1.75
• The company currently pays $6.80 for each set of socks. = P

The company uses a continuous review replenishment policy, and has IT systems in place that allow constant monitoring of key information. Last year, the company used an ROP under this policy of 1,900 units for all sock styles and an order quantity Q of 4,500 units for all sock styles.