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? Why?
An Item in the product line for the food company discussed in the previous question has the following characteristics:
Sales Response rate= 0.15% change in revenue for a 1% change in the service level
Trading Margin= 0.75/case
Annual sales through the warehouse= 80,000 cases
Annual Carrying cost=25%
Standard product cost= $10.00
Demand Standard dviation= 500 cases per 1 week lead time
Lead Time= 1 week
C. Find the optimum service level for this item