The manager is reluctant to specify a backorder cost, Ask an Expert

Management Studies

Info Business Equipment (IBE) sells information-processing equipment. One item, the HDO80 800GB hard disk, has monthly demand that is normally distributed with mean 250 and standard deviation 100. IBE purchases the HDO80 for $360 a unit and sells it for $450. To place an order costs $209, and it takes one month from the time the order is placed until it arrives. Because the HDO 80 is very popular and hard to get, customers who want one will wait as long as necessary to get one. The inventory cost carry rate IBE uses is 20 percent.

If the paperwork cost to backorder an item is estimated to be $5 per unit, what inventory policy would you recommend?

The manager is reluctant to specify a backorder cost because she feels that substantial goodwill is also lost. She is willing to state that 98 percent of the customer demand should be satisfied immediately. What is your recommendation now?

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Operation Management, Management Studies

Category:- Operation Management
Reference No.:- M9346914

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