Minimize inventory holding and back order penalty costs

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Reference no: EM132149513

You are the owner of ExoticCooking.com, an online retailer of hip, exotic, and hard-to-find spices. Consider your inventory of saffron, generally worth more by weight than gold. You order saffron from an overseas supplier with a shipping lead-time of four weeks and that you order weekly. Your average quarterly demand is normally distributed with a mean of 415 ounces and a standard deviation of 154 ounces. The holding cost per ounce per week is $0.75. You estimate that your back-order penalty cost is $50 per ounce. Assume that there are 4.33 weeks per month.

c. If you wish to minimize inventory holding and back order penalty costs, then what should your order up-to level be?

d. If you arbitrarily decide an order up-to level of 250, what fraction of the demand will not be met immediately? What is the expected on-hand inventory at the beginning of a period?

Reference no: EM132149513

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