Home Repair is a large hardware retail store that often has to place orders for hammers. The fixed cost for placing an order is $500, independent of the size of the order. The unit cost per hammer is $20. Home Repair estimates that the cost of holding a hammer in inventory for 1 week is $3. The company defines its inventory position at the beginning of any week as the number of hammers in inventory, plus any that have already been ordered but have not yet arrived, minus any backorders. The company’s ordering policy is an (s, S) policy, a common periodic review policy used by many companies. This policy, defined by two numbers s and S, where s <>
The weekly demand for hammers is uncertain, but it can be described by a normal distribution with mean 300 and standard deviation 75. The company’s policy is to satisfy all demand in the week it occurs. If weekly demand cannot be satisfied completely from onhand inventory, then an emergency order is placed at the end of the week for the shortage. This order arrives virtually instantaneously but at a steep cost of $35 per hammer.
It is currently the beginning of week 1, and the current inventory of hammers, including any that might just have arrived, is 600. No other orders are on the way. Home Repair wants to simulate several (s, S) policies to see which does best in terms of total costs over the next 48 weeks.9
Objective To use simulation to analyze costs when the company uses an (s,S) ordering policy.