Consider the example regarding managing A items with Poisson demand.

a) Let Q=1. Determine the basestock level, s, under:

b1 costing criteria.

b2 costing criteria. Set b1 and b2 arbitrarily (but reasonably).

When deriving s, explicitly show your approach. That is express the expected total cost per unit time (TC(s)) under the corresponding cost criteria. Then, express DTC(s)=TC(s)-TC(s-1). Describe how one should use DTC(s) to determine optimal s.

b) Let Q=2. Determine the minimum reorder level, s, that satisfies Fill-rate>=0.99. Define fill-rate (P2) as the “Fraction of demand met immediately from the shelf.”

c) Another possible service level measure is ready rate, defined as the “Fraction of time during which net inventory is positive.” Ready-rate is denoted with P3, see p.245 of Silver et al 1998. Under Q=2, determine the minimum reorder level, s, that satisfies Ready-rate>=0.99. Compare the s value you have found under P3, with the s under P2. Are they the same? Explain why or why not.