A distributor is positioned in the supply channel between his customers and suppliers. He knows that the customers maintain inventory that should be taken into account in planning his own inventory levels. In the spirit of cooperation, the customers share their end demand data with the distributor. For a particular item supplied by the distributor to three customers in his territory, the monthly demand for an item valued at the customer echelon at $35 per unit is as follows:

The item is valued a little less at the distributor ($30 per unit) since some costs such as transportation to customers have not yet been added. Inventory-carrying cost is estimated at 20 percent per year at both echelons. Order-placement cost for the customers is $50 per order. The distributor can supply the customers within two weeks, but it takes vendors four weeks to fill the distributor's replenishment orders. Customers set their in-stock probability during the order cycle at 95 percent, whereas the distributor uses 90 percent. Both echelons use the reorder point method of inventory control. The distributor places orders on the vendor for 2,000 units to realize a purchase discount.
How much inventory of this item should the distributor stock if no inventory is assumed to be in transit to customers?

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Demand Std. Dev, Units/Mo 65 52 43 944 Customer Avg. Demand. Units/Mo 425 276 1,034 Combined Estimated 65+52+