Question

The Winfield Distributing Company has maintained an 80% service level policy for inventory of string trimmers....

The Winfield Distributing Company has maintained an 80% service level policy for inventory of string trimmers. Mean demand during lead time is 170 trimmers, and the standard deviation during lead time is 60 trimmers. The annual cost of carrying one trimmer in inventory is \$6. The area sales people have recently told Winfield's management that they could expect a \$400 improvement in profit (based on current figures of cost per trimmer) if the service level were increased to 99%. Is it worthwhile for Winfield to make this change?

Z value for 80% service level = Z1 = NORMSINV ( 0.80 ) =

Z value for 99% service level = Z2 = NORMSINV ( 0.99) =

Standard deviation of demand during lead time = Sd = 60 trimmers

Therefore ,

Safety stock for 80% service level = Z1 x Sd = 0.8416 x 60 = 50.49

Safety stock for 99% service level = Z2 x Sd = 2.326 x 60 = 139.56

Therefore, increase in safety stock by increasing service level from 80% to 99% = 139.56 – 50.49 = 89.07

Annual unit inventory carrying cost = \$6

Therefore, increase in inventory carrying cost due to increase in safety stock = \$6 / unit x 89.07 units = \$534.42

Thus while increase in service level increases profit by \$400, it also increase cost by \$534.42. Since , increase in cost > Increase in profit, it is not worthwhile for Winfield to make this change