A product has a reorder point of 260 units, and is ordered ten times a year on average. The following table shows the historical distribution of demand values observed during lead time
Demand Probability
240 .1
250 .2
260 .4
270 .2
280 .
1
Currently, stockouts are valued at $5 per unit per occurrence, while inventory carrying costs are $2 per unit per year. Should the firm add safety stock? If so, how much safety stock should be added?
Action Safety stock cost Stockout cost Total cost
ROP=260 (SS=0 ) 0 = $0 .2 × 10 × 5 × 10 = $100
.1 × 20 × 5 × 10 = $100
$0 $200 $200
ROP=270 (SS=10 ) 10 × $2 = $20 .1 × 10 × 5 × 10 = $50
$20 $50 $70
ROP=280 (SS=20 ) 20 × $2 = $40 0 = $0
$40 $0 $40
The current policy is not the cheapest inventory policy for this product. The cheapest inventory policy has a reorder point of 280, so the firm should add 20 units of safety stock.
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