Suppose Boundaries Bookstore sells books in traditional brick-and-mortar outlets, while Jungle.com sells books over the Internet....

 

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Suppose Boundaries Bookstore sells books in traditional brick-and-mortar outlets, while Jungle.com sells books over the Internet. Hence, Boundaries holds separate stocks of a given book in each store, while Jungle.com holds all its inventory in a central warehouse. Both firms use a classic base stock model in which the reorder point is given by ROP = µ + ko, where μ and o are the mean and standard deviation of monthly demand and k is a safety factor, a z-value from Standard Normal Distribution. In such a system, the ko term represents the safety stock (i.e., inventory held to provide good customer service despite variability in demand). a) Suppose Boundaries has 100 outlets and uses a safety factor of k = 2to control safety stocks. If a particular book sells an average of 10 copies per month at each store, with a standard deviation of 3, how much safety stock will the firm carry across all its outlets? b) Suppose Jungle.com sells the same number of books (i.e., 1,000 copies) as Boundaries. Furthermore, suppose that its demand process behaves like the sum of the demand at the 100 Boundaries stores. That is, each Boundaries store has monthly demand with a standard deviation of 3, or a variance of 3² = 9. Assuming that demand at each Boundaries store is independent, the variance of total demand is the sum of the individual demand variances or (100) (9) = 900. Hence, the standard deviation of total demand at Boundaries is√900 = 30. If Jungle.com has demand with these parameters (mean = 1,000, standard deviation = 30), and it uses the same safety factor (k = 2) so that its service level is the same as Boundaries', how much safety stock will the firm carry? c) Which firm carries less safety stock? Explain why one store can provide the same level of service with so much less safety stock. Suppose Boundaries Bookstore sells books in traditional brick-and-mortar outlets, while Jungle.com sells books over the Internet. Hence, Boundaries holds separate stocks of a given book in each store, while Jungle.com holds all its inventory in a central warehouse. Both firms use a classic base stock model in which the reorder point is given by ROP = µ + ko, where μ and o are the mean and standard deviation of monthly demand and k is a safety factor, a z-value from Standard Normal Distribution. In such a system, the ko term represents the safety stock (i.e., inventory held to provide good customer service despite variability in demand). a) Suppose Boundaries has 100 outlets and uses a safety factor of k = 2to control safety stocks. If a particular book sells an average of 10 copies per month at each store, with a standard deviation of 3, how much safety stock will the firm carry across all its outlets? b) Suppose Jungle.com sells the same number of books (i.e., 1,000 copies) as Boundaries. Furthermore, suppose that its demand process behaves like the sum of the demand at the 100 Boundaries stores. That is, each Boundaries store has monthly demand with a standard deviation of 3, or a variance of 3² = 9. Assuming that demand at each Boundaries store is independent, the variance of total demand is the sum of the individual demand variances or (100) (9) = 900. Hence, the standard deviation of total demand at Boundaries is√900 = 30. If Jungle.com has demand with these parameters (mean = 1,000, standard deviation = 30), and it uses the same safety factor (k = 2) so that its service level is the same as Boundaries', how much safety stock will the firm carry? c) Which firm carries less safety stock? Explain why one store can provide the same level of service with so much less safety stock.

Answer rating: 100% (QA)

SOLUTION a To calculate the safety stock for Boundaries we can use the given formula ROP ko Given that the average monthly demand per store is 10 and the standard deviation is 3 and the safety factor ... View the full answer