Question

Consider the item you sell comes from an overseas supplier with a shipping lead time of four weeks and you order weekly. Average quarterly demand is normally distributed with a mean of 415 units and a standard deviation of 154 units. The holding cost per unit per week is $0.75. You estimate that your backorder penalty cost is $50 per unit (this is a very high margin product). Assume there are 4.33 weeks per month.

a) If you wish to minimize holding and backorder costs, then what should your order‐up‐to level be? [11 pts]

b) Now consider another product you sell. This is not as popular and as high margin as the above unit. You can order this item daily and your local supplier delivers with a 2‐day lead time. Average demand per day has a mean of 1 unit with a daily standard deviation of 0.5 units. The holding cost per unit per day is $0.05 and the backorder penalty cost is about $5 per unit. What is your optimal order‐up‐to level? [10 pts]

Answer 1