Describe the two key factors that influence the optimal level of product availability within a supply chain
What will be an ideal response?
Answer: The two key factors that influence the optimal level of product availability are:
• Cost of overstocking the product
• Cost of understocking the product
The cost of overstocking is denoted by Co and is the loss incurred by a firm for each unsold unit at the end of the selling season. The cost of understocking is denoted by Cu and is the margin lost by a firm for each lost sale because there is no inventory on hand. The cost of understocking should include the margin lost from current as well as future sales if the customer does not return. The costs of overstocking and understocking have a direct impact on both the optimal cycle service level and profitability.
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