Question: Talbot Industries is evaluating its service level policy for a
Talbot Industries is evaluating its service level policy for a product that is considered critical to customers. Demand for item average 100 units per day and the lead time form the supplier of the item averages 6 days. An analysis of demand and lead time patterns has shown that the standard deviation of demand during lead time is 110 units. existing service level policy allows for a stockout probability of 10% during the during the replenishment cycle. Marketing managers claim that the item is so critical that the firm should carry three standard deviations of safety stock. If the item cost is $60 and Talbot’s inventory carrying cost is 20%, what is the incremental inventory carrying cost of the suggestion by marketing managers?
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