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Question
A product has a reorder point of 260 units, and is ordered ten times a year on average. The following table shows the historical distribution of demand values observed during lead time.
| Demand | Probability |
| 240 | .1 |
| 250 | .2 |
| 260 | .4 |
| 270 | .2 |
| 280 | .1 |
Currently, stockouts are valued at $5 per unit per occurrence, while inventory carrying costs are $2 per unit per year. Should the firm add safety stock? If so, how much safety stock should be added?
Answer
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