Essay About 0.50.5Cost And Cake Mix

Toy World
1. Company-owned StoresFranchiseesCost of Overstocking (Co)0.50.5Cost of Understocking (Cu)2.251.5Best Service Level0.820.751.e. The service level in company-owned stores is better than that of franchisees. That’s why centralized decision-making for store level inventory will lead to higher overall profitability.2.Review period for cake mix = 7 days (given in the case)Lead time for mixing cake = 3 days (given in the case)Exposure period for cake mix inventory planning = Review Period + Lead Time = 10 days.3.a. Stock-out Cost:In stock-out situation, JB employees have to drive to grocery stores and the employee overtime cost = $20 / hourRequired employee over-time = 15 hoursSo, total overtime cost = ($20 x 15) = $300Extra cost per pallet = $300So, total stock-out cost = $300 + $300 = $600b. Holding Cost:Annual holding cost is 12% of the total relevant cost of a pallet of cake mix, which is $1000.So, annual holding cost = $1000 x 12% = $120.c. Cost of Over-stocking through 1 Review Period:Over-stocking cost for a year or for 52 weeks is $120. Review Period = 1 week.So, Cost of over-stocking through 1 review period = ($120/52) = $2.31d. Best Service Level for Cake mix:Best Service Level = [Cost of Stock-out/ (Cost of Stock-out + Overstocking Cost)] for one period= 600/ (600 + 2.31) = 0.9964. a. Target Stock-level for Vanilla Cake mix:For order quantity of 5 pallets, the cumulative probability is 0.997.The best service level for cake mix = 0.996So, the target stock-level for vanilla cake mix = 5 pallets b. If on next week’s review day, JB finds two pallets of vanilla cake mix on hand, it should order (5-2) = 3 pallets.