A food company is attempting to set the customer service level (in-stock probability in its warehouse) for a particular product line item. Annual sales for the item are 100,000 boxes, or 3,846 boxes biweekly. The product cost in inventory is $10, to which $1 is added as profit margin. Stock replenishment is every two weeks and the demand during this time is assumed normally distributed with a standard deviation of 400 boxes. Inventory carrying costs are 30 percent per year of item value. Management estimates that a 0.15 percent change in total revenue would occur for each 1 percent change in the in-stock probability.
(a). Based on this information, find the optimum in-stock probability for the item.
(b). What is the weakest link in this methodology?