Rocky Mountain Power (RMP) maintains an inventory of spare parts that is valued at nearly $8 million. This inventory is composed of different SKUs (Stock Keeping Unit) used for power generation and utility line maintenance, and the inventory balances are updated on a computerized information system. Glass insulators (SKU1341) have a relatively stable usage, averaging at 1000 items per year. RMP purchases these items from the manufacturer at $20 per unit delivered to the Denver warehouse. An order for replenishment is placed whenever the inventory balance reaches a predetermined reorder point. The cost associated with placing an order is estimated at $30. This includes the cost of order processing, receiving and distribution to the outlying substations. An estimate of the annual inventory holding cost of SKU 1341 is estimated at $6 per unit. This holding cost represents a 30% opportunity cost of capital. SKU 1341 is essential and RMP must avoid depleting its stock of this item.
We want to determine the replenishment order for SKU 1341 which minimizes inventory costs.