How much variability from the target stocking

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Reference no: EM132099873

A retailer has targeted a shelf item to be out of stock only 5 percent of the time (m). Customers have come to expect this level of product availability, so much so, that when the out-of-stock percentage increases, customers seek substitutes and lost sales occur. From market research studies, the retailer has determined that when the out-of-stock probability increases to the 10 percent level (y), sales and profit drop one-half of those at the target level. Decreasing the out-of-stock percentage from the target level seems to have little impact on sale, but it does increase incentory-carrying costs substantially. The following data have been collected on the item:

Price: $8.95

Cost of Item: $4.50

Other expenses associated with stock the time: $0.30

Annual Items sold @ 95% in-stock: 880

The retailer estimates that for every one percentage point that the in-stock probability is allowed to vary from the target level, the unit cost of supplying the item decreases according to C = 1.00-0.10(y-m), where C is the cost per unit, y is the out-of-stock percentage, and m is the target out-of-stock percentage.

How much variability from the target stocking percentage should the retailer allow?

Reference no: EM132099873

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