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======== A distributor is planning to calculate the optimal service level given the following information. Based on past data, sales response rate...
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A distributor is planning to calculate the optimal service level given the following information. Based on past data, sales response rate is 0.12% change in revenue for a 1% change in the service level (fill rate). Trading margin is $18 per item, inventory carrying cost is 24% per year, annual sales through the warehouse is 120,000 items. Cost of each item is $75, demand standard deviation is 300 items for a week, and the lead time is 4 weeks.
a. Calculate ΔP
ΔP = Trading Margin x Sales Response Rate x Annual Sales
=$18 x 0.12% x120,000
=$2,592
® Therefore, Delta_P (ΔP) is $2592
b. Calculate ΔC
ΔC = Annual Carrying cost x Standard Product Cost X Demand Standard Deviation x lead – time x ΔZ
= 24% x $75 x 300 x 4 x ΔZ
= 21600ΔZ
® Therefore, Delta_C (ΔC) is 21600ΔZ
c. Calculate ΔZ
Set ΔP = ΔC
ΔZ = (ΔP / ΔC)
= 2592 / 21600
= 0.12
® Therefore, ΔZ is 0.12
d. Determine the optimal service level
