A product has a reorder point of 110 units, and is ordered four times a year. The following table Shows the historical distribution of demand values observed during the reorder period.
Demand Probability
100 0.3
110 0.4
120 0.2
130 0.1
Managers have noted that stock outs occur 30 percent of the time with this policy, and question
whether a change in inventory policy, to include some safety stock, might be an improvement. The
managers realize that any safety stock would increase the service level, but are worried about the
increased costs of carrying the safety stock. Currently, stock-outs are valued at $20 per unit per
occurrence, while inventory carrying costs are $10 per unit per year. What is your advice? Do higher
levels of safety stock add to total costs, or not? What level of safety stock is best