CheapBuy is an electronics retail chain selling Gateway netbooks. The demand for the Gateway netbook LT20 at their local store is normally distributed with a mean of 120 netbooks/week and standard deviation of 10 netbooks/week. CheapBuy orders netbooks from Gateway at unit cost of $180. The annual cost of carrying inventory at the store is 20% of the purchase cost per unit per year. It takes 2 weeks to receive a delivery. The store reviews and places an order at the start of each week.
(Note: z values corresponding to standard normal probabilities may be calculated using Excel or using the table provided below) Given that the store uses the above periodic review inventory policy:
a. Compute the safety stock (number of netbooks) needed to maintain a service level of 95%.
b. What is the annual holding cost for carrying this safety stock?
c. How much additional safety stock would be needed if CheapBuy wishes to increase the service level at their local store from 95% to 98%? What is the additional cost associated with this increase in safety stock?
Table of Z values
0.99=2.326 0.89=1.227
0.98=2.054 0.88=1.175
0.97 1.881 0.87 1.126
0.96 1.751 0.86 1.080
0.95 1.645 0.85 1.036
0.94 1.555 0.84 0.994
0.93 1.476 0.83 0.954
0.92 1.405 0.82 0.915
0.91 1.341 0.81 0.878
0.90 1.282 0.80 0.842