Safety stock and expected annual shortage cost

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Reference no: EM131133526

Lee Camera stocks two items in its warehouse which it purchases from an outside supplier. Demand for the two items are independent; the inventory carrying percentage is 20% and for each item, the demand during lead time is a normal random variable with mean = 100 and standard deviation = 20. Since customers are willing to wait for the camera when he is out of stock, the shortage penalty is low. The relevant data for each item are the same and shown below.

Expected yearly demand 2400

Cost of item $750

Order cost, K $10

Unit shortage cost $5

(a) Suppose for each item Lee orders 50 units whenever its reorder point is reached. Given these order quantities for each item, find for each item it’s appropriate reorder point, safety stock and expected annual shortage cost.

(b) Suppose that any customer who wants item 1 and finds it to be out of stock will purchase item 2 and vice versa. Would you change the order quantities and reorder point policies in part (a)? If so, how and what are the safety stock and expected annual shortage cost.

Reference no: EM131133526

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