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.
Managers have noted that stockouts occur 30% 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?
Definitions:
Average Total Cost
The total cost divided by the quantity produced, representing the cost of producing each unit of output.
Long Run
A period in which all factors of production and costs are variable, allowing full adjustment to changes.
Demand Equals
A state in a market where the quantity of a good or service desired by buyers is equal to the quantity supplied by sellers, resulting in market equilibrium.
Marginal Cost
The added expenditure resulting from creating an additional product or service unit.
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