Reference no: EM132153143

From market research, the retailer has estimated that an expected target availability level for items should be 97%. When the availability level decreases, the retailer incurs a penalty (e.g. price reductions, lost future sales, reduced reputation). The retailer has determined that when the availability level decreases to 90%, the profit is reduced by 30% from the profit at the target level.

On the other hand, increasing the availability level and reducing the variability has significant implications on the supply chain, production and inventory-carrying costs.

The retailer estimates that for every one percentage point that the availability is allowed to vary from the target level, the unit cost of supplying the item decreases of £0.06.

The following data have been collected on an item:

Price £15.95

Profit per Item (sold @ 97% availability): £2.00

a. Applying Taguchi Lost Function, estimate how much variability from the target availability percentage the retailer should allow. Explain each step of your calculation.

b. Explain two reasons why the cost of supplying the item decreases with every one percentage point that the availability is allowed to vary from the target level.