The Nursing Home orders replacement walkers for residents on

The Nursing Home orders replacement walkers for residents once a year and the reorder point, without safety stock, is 100 walkers. Inventory carrying costs are $10 per year and the cost of a stockout is $50 per walker. Given the following demand probabilities during the lead time (see table below), how much safety stock should be carried? (Show your work.)

Demand During Lead Time

Probability

0

.1

50

.2

100

.4

150

.2

200

.1

Demand During Lead Time	Probability
0	.1
50	.2
100	.4
150	.2
200	.1

Solution

Incremental Costs Safety Stock Carrying Cost Stockout Cost Total Cost 0 0 (50*0.2+100*0.4)*50=2500 2500 50 (50*10)=500 (50*0.2)*50=500 1000 100 (100*10)=1000 0 1000 Level of safety stocks that minimises cost is either 50 or 100 hence choosing minimum level amongst them to find new reorder point 100+50 =150 units