Freeport Corporation finds that demand for surfboards has average demand of 10 units per day, with a standard deviation of 3 units. Lead time from the supplier averages 12 days, with a standard deviation of 2 days. The item costs $50 and the inventory carrying cost is 30%.
a. Suppose management decides to offer a 95% service level. That is, it is willing to experience a stockout probability of 5% during the order cycle. How much safety stock should be carried?
b. How much is the annual inventory carrying cost of the safety stock because of this decision?
c. You decide that you want this company to give better service to its customers. You decide that
d. What is the additional inventory carrying cost that will be incurred on this item because of your decision to increase the service level?
e. What will the reorder point be for the company if your decision is implemented?

  • CreatedMarch 30, 2015
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