In the previous problem, the manufacturer performs additional market research
Based on this research, they determine that they can increase the price to $150 and are able to reduce the standard deviation of the forecast to ? = 30. At the same time, they have made an arrangement with an outlet store that will purchase unsold equipment for $60 each. How will these changes affect the cost of overstocking, cost of understocking, optimal cycle service level and optimal order size?
What will be an ideal response?
Answer:
Co = c - s
= $75 - $50
= $25
Cu = p - c
= $150 - $75
= $75
CSL* = Cu/(Cu + Co)
= 75/(75 + 25)
= .75
O* = NORMINV(CSL*, μ, σ)
= NORMINV(0.75, 100, 30)
= 120.2347 ≈ 120
The change in price increases the cost of understocking. The increase in the salvage value reduces the cost of overstocking. Both of these changes will make it more profitable to increase product availability, which is seen in the increase in the optimal cycle service level. The reduction in standard deviation is the result of a more accurate forecast, which means that less excess inventory is needed to maintain the optimal cycle service level.
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a. TRUE b. FALSE
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