The Winfield Distributing Company has maintained an 80% service level policy for inventory of string trimmers. Mean demand during lead time is 170 trimmers, and the standard deviation during lead time is 60 trimmers
The annual cost of carrying one trimmer in inventory is $6. The area sales people have recently told Winfield's management that they could expect a $400 improvement in profit (based on current figures of cost per trimmer) if the service level were increased to 99%. Is it worthwhile for Winfield to make this change?
This is solved with a cost comparison: total costs status quo compared to total costs at higher service, as amended by the increased profit. First calculate the safety stock. SS = 0.84 ? 60 = 50.4 trimmers at $6 each, this safety stock policy costs about $302.40. At a service level of 99%, the safety stock rises to 2.33 ? 60 = 139.8, which will cost $838.80. The added cost is $536.40, which is more than the added profit, so Winfield should not increase its service level.
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