A product has a reorder point of 110 units, and is ordered four times a year on average. The following table shows the historical distribution of demand values observed during lead time
Demand Probability
100 .3
110 .4
120 .2
130 .1
Managers have noted that stockouts occur 30 percent of the time with this policy, and they question whether a change in inventory policy, to include some safety stock, might be an improvement. The managers realize that any safety stock would increase the service level, but they are worried about the increased costs of carrying the safety stock. Currently, stockouts are valued at $20 per unit per occurrence, while inventory carrying costs are $10 per unit per year. What is your advice? Do higher levels of safety stock add to total costs, or not? What level of safety stock is best?
Action Safety stock cost Stockout cost Total cost
ROP=110 (SS=0 ) 0 = $0 .2 × 10 × 20 × 4 = $160
.1 × 20 × 20 × 4 = $160
$0 $320 $320
ROP=120 (SS=10 ) 10 × $10 = $100 .1 × 10 × 20 × 4 = $80
$100 $80 $180
ROP=130 (SS=20 ) 20 × $10 = $200 0 = $0
$200 $0 $200
The cheapest inventory policy has 10 units of safety stock. The managers should not be concerned about carrying cost only, but should consider that, while carrying costs rise, stockout costs fall.
You might also like to view...
Data per passenger-mile is often used by transportation companies to analyze:
a. capacity. b. revenue. c. borrowing ability. d. earnings per share. e. leverage.
Feasibility Report for New Office Hasley's, a retail chain based in the Midwest, has offices in several locations throughout the United States. Due to expanding markets, the company is conducting research on the need to open an office at a new location
in the Southwest. You are a member of a team asked to write a report on the feasibility of an office at this new location. The team must define the scope of the report and develop a statement of purpose. Required: Identify five questions that can be answered to help the team limit the scope of this report. Provide an answer to each question and write a statement of purpose for the report.
Refer to the scenario above. Operations managers and process engineers design a line that contains seven stations. What is the percentage of idle time?
A) 21.9% B) 14.3% C) 25.6% D) 17.8%
If an employee presents false documentation of eligibility to work in the United States, his or her employer is subject to deportation
Indicate whether the statement is true or false