Mr. Beautiful, an organization that sells weight training sets, has an ordering

Question

Mr. Beautiful, an organization that sells weight training sets, has an ordering cost of $40 for the BB-1 set (BB-1 stands for Body Beautiful Number 1). The carrying cost for BB-1 is $10 per set per year. To meet demand, Mr. Beautiful orders large quantities of BB-1 7 times a year. The stockout cost for BB-1 is estimated to be $40 per set. Over the past several years, Mr. Beautiful has observed the following demand during the lead time for BB-1: The reorder point for BB-1 is 120 sets. What level of safety stock should be maintained for BB-1 The optimal quantity of safety stock which minimizes expected total cost is sets

Explanation / Answer

Hence average demand during lead time = 125

Carrying cost = 10 per set per year

Stock out cost = 40 per set

Reorder Level = Safety Stock + Average monthly Usage × Lead Time in months

120 = safety stock + 125*12/7

Safety stock = 120-43 = 77

Demand during lead time probability Lead time * prob 100 0.1 10 110 0.2 22 120 0.2 24 130 0.2 26 140 0.2 28 150 0.1 15 1 125

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