A large toy company Mttel currently allows toy retailers to place orders with delivery in 2 weeks.
Question:
A large toy company Mttel currently allows toy retailers to place orders with delivery in 2 weeks. The Gigantic Pocket Monster (Gipokmon) is a new toy that Mttel has introduced. Mttel charges a wholesale price of $10 for the Gipokmon. The manager of a small boutique toy retail company, TOYS-are-MINE, plans to sell the toy for $20 and incurs a holding cost of $0.1 per toy per week. At this price, demand per week for the toy at one of their stores is estimated to be Poisson distributed with a mean of 1.5 units. Assume that the backorder cost is equal to the product's retail margin. Assume TOYS-are-MINE uses the order-up-to model to plan orders and deliveries to this store.
Given their cost and price for the Gipokmon, what is the optimal in-stock probability (Service Level) that TOYS-are-MINE should target ?