Determine what the weekly stock out cost – Operation Management
Problem –
Dumoor Appliance Center sells and services several brands of major appliances. Past sales for a particular model of refrigerator have resulted in the following probability distribution for demand:
| Demand Per Week | 0 | 1 | 2 | 3 | 4 |
| Probability | 0.20 | 0.40 | 0.20 | 0.15 | 0.05 |
The lead-time in weeks is described by the following distribution:
| Lead Time (weeks) | 1 | 2 | 3 |
| Probability | 0.15 | 0.35 | 0.50 |
Based on cost considerations as well as storage space, the company has decided to order 10 of these each time an order is placed. The holding cost is $1 per week for each unit that is left in inventory at the end of the week. The stock out cost has been set at $40 per stock out. The company has decided to place an order whenever there are only two refrigerators left at the end of the week. Simulate 10 weeks of operation for Dumoor Appliance, assuming that there are currently 5 units in inventory. Determine what the weekly stock out cost and weekly holding cost would be for the problem. Use the random numbers in the first column of Table F.4 for demand and the second column for lead time.
