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at the DCs were based on safety stocks that were a result of some judgmental rule of thumb” (p. 7). You should assume that this “rule of thumb” is to keep inventory equal to one-month’s average sales. To be
consistent, use the following interpretation: (target physical inventory level at the DC) = (average physical inventory at the DC) = (one month’s average sales). Recall that (avg physical inv) = (avg cycle stock) + (safety stock), whereas (avg inv position) = (avg physical inv) + (avg pipeline inv). Thus if we are keeping one month’s average sales as physical inventory, thenwe have (1 month’s avg sales) = (avg cycle stock) + (implied level of SS), or SS = (1 month’s avg sales) – (avg cycle stock). Since we know that (avg cycle stock) = (avg demand during T)/2, and since T = 1 week, we get SS = (1 month’s avg sales) – (1 week’s avg sales)/2.For example, for Option Aone-month’s average sales = 42.3 printers, i.e., one-week’s average sales = 42.3/4.33 = 9.8 printers. If the average physical inventory at the DC is set to 42.3 printers, then: 42.3 = (avg cycle stock) + Safety StockSafety Stock = 42.3 − (avg cycle stock) = 42.3 − (9.8)/2 = 37.4 printers. You should be able to compute that if the safety stock is 37.4, then the service level for Option Awill be less than 98%. So, under the “current policy,” inventory for Option Awill probably be lower than what you computed in Question 1 (and thus inventory cost will be lower), but the service level for Option A will be lower than the required 98%. Note that pipeline (or in-transit) inventory is not held by the DC, but its cost should be included in the supply chain cost. Suggested length: 2 pages, possibly more when Excel printouts are included.