ESI 6323 HW8 Word document

# ESI 6323 HW8 Word document - SUPPLY CHAIN MANAGEMENT, 3/E:...

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1. Salvage value s = \$50 – \$20 = \$30 Cost of understocking = C u = p – c = \$200 - \$150 = \$50 Cost of overstocking = C o = c – s = \$150 – \$30 = \$120 CSL * = C u /(C u + C o ) = 50/(50 + 120) = 0.29 O * = NORMINV(CSL * , , ) =NORMINV(0.29,100,40) = 78 μ σ Green Thumb should manufacture 78 units for sale. Expected profits =(200-30)*100*NORMDIST((78-100)/40,0,1,1) -(200-30)*40*NORMDIST((78-100)/40,0,1,0) -78*(150-30)*NORMDIST(78,100,40,1) +78*(200-150)*(1-NORMDIST(78,100,40,1)) = \$2,657 The expected profit from this policy is \$2,657. Expected understock =(100-78)*(1-NORMDIST((78-100)/40,0,1,1))+40*NORMDIST((100-78)/40,0,1,0) = 29 On the average, Green Thumb expects to turn away 29 customers because of stocking out. 2. Replacing = 40 with = 15, σ σ O * =NORMINV(0.29,100,15) = 92 Green Thumb should alter its production plans by manufacturing 92 units instead of 78. Expected profits =(200-30)*100*NORMDIST((92-100)/15,0,1,1) -(200-30)*15*NORMDIST((92-100)/15,0,1,0) -92*(150-30)*NORMDIST(92,100,15,1) +92*(200-150)*(1-NORMDIST(92,100,15,1)) = \$4,121 \$4,121 – \$2,657 = \$1,464 It is likely to observe an increase in profit of \$1,464, which is about 55%. Expected understock

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## This note was uploaded on 05/12/2010 for the course ESI 6323 taught by Professor Guan during the Summer '09 term at University of Florida.

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ESI 6323 HW8 Word document - SUPPLY CHAIN MANAGEMENT, 3/E:...

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