Three Chums Fish Company buys fresh salmon daily from the fishermen that ply the deep waters of Puget Sound

Question

The salmon are kept fresh by displaying them on ice but at the end of the day, any unsold fish have a noticeable odor and are sold to a nearby chowder stand for $1 per pound. The past year's demand for salmon on Saturdays is shown in the table. Based on this information, what should their target service level and stocking point be? What is the significance of the target stocking level?

Daily Demand (pounds) # Days at This Level
300 3
320 4
340 6
360 9
380 9
400 8
420 6
440 5
460 2
What will be an ideal response?

Answer 1

Answer: The target service level is calculated as follows:

CShortage = Sale Price - Item Cost
CShortage = $8.50 - $2.50 = $6.00
CExcess = Item Cost + Disposal Cost - Salvage Value
CExcess = $2.50 - $1.00 = $1.50

SLT = = = 0.80

Daily Demand (pounds) # Days at This Level Percentage Cumulative Pct
300 3 5.8% 5.8%
320 4 7.7% 13.5%
340 6 11.5% 25.0%
360 9 17.3% 42.3%
380 9 17.3% 59.6%
400 8 15.4% 75.0%
420 6 11.5% 86.5%
440 5 9.6% 96.2%
460 2 3.8% 100%

In order to hit the target service level of 80%, the fish company should purchase 420 pounds of salmon from the fishermen. This target stocking point is where the expected cost of a shortage equals the expected cost of having excess units and in the long run, this will maximize the fishmonger's profits.