A Product Has a Reorder Point of 110 Units, and Is

question 108

Essay

A product has a reorder point of 110 units, and is ordered four times a year. The following table shows the historical distribution of demand values observed during the reorder period.
$$\begin{array} { | c | c | } \hline \text { Demand } & \text { Probability } \\\hline 100 & .3 \\\hline 110 & .4 \\\hline 120 & .2 \\\hline 130 & .1 \\\hline\end{array}$$
Managers have noted that stockouts occur 30 percent of the time with this policy, and question whether a change in inventory policy, to include some safety stock, might be an improvement. The managers realize that any safety stock would increase the service level, but are worried about the increased costs of carrying the safety stock. Currently, stockouts are valued at $20 per unit per occurrence, while inventory carrying costs are $10 per unit per year. What is your advice?
Do higher levels of safety stock add to total costs, or not?
What level of safety stock is best?

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Definitions:

Property Damage Liability

A component of auto insurance that covers damage you, as the driver, might cause to another person's property.

Underinsured Driver

A motorist who has insurance coverage, but not enough to cover the full costs of a claim from an accident.

Depreciation Rate

The rate at which an asset loses its value over time, often used for accounting and tax purposes.

ABS

Stands for Anti-lock Braking System, a safety feature in vehicles that prevents the wheels from locking up during braking, ensuring the driver maintains steering control.