Compute the change in safety stock if they ship by sea

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Reference no: EM131181314

Consider a producer who can receive shipments by sea or air. The mean demand is 5000/week, H = 0.50 $/unit/year, S= 20000/order. L=2 weeks if they ship by air. Standard deviation of damnd = 1500 per week. Suppose we have the following extra information: if they ship by sea instead of air, L=3 weeks. It saves $5000 per year in transportation cost. Assume service level needed is 95%.

a) Note that if lead time increases safety stock will increase. Compute by how much.

b) Should they ship by sea? (Hint; Compute the change in safety stock if they ship by sea. Then see if the cost of carrying this additional stock is worth the saving in transportation cost.)

Reference no: EM131181314

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