A Food company is attempting to set the customer service level (in stock probability in its warehouse) for a particular product line item. Annual sales for the item are 110,000 boxes, or 4230 boxes biweekly. The product cost in inventory is $10, to which $1 is added as profit margin. Stock replenishment is every two weeks and the demand during this time is assumed normally distributed with a standard deviation of 400 boxes. Inventory carrying costs are 30 percent per year of item value. Management estimates that a 0.17 percent change in total revenue would occur for each 1 percent change in the in-stock probability.
A. Based on this information, find the optimum in-stock probability for the item.
B. What is the weakest link in this methodology? Why?
a) Optimum service level is the point where the change of cost equals to the change of profit (∆p = ∆c) ∆p = Trading... View the full answer