Ryan's Liquor Shoppe orders Scotch whiskey four times a year. The lead time for reordering is estimated to be 25 days. Average demand for Scotch whiskey is 2 cases per day (320 business days per year). Ryan's has estimated the stock-out cost to be $50 per case and the inventory holding cost to be approximately $30 per case per year. Based on past reorder periods, actual demand distribution is:
Demand during Lead Time (DDLT) Frequency
40 cases 32 times
45 64
50 128
55 64
60 32
Ryan's is considering carrying 0, 5, or 10 boxes of safety stock.
a. Determine the annual shortage cost (TSC) and safety stock holding cost (SHC).
b. Determine the optimal level of safety stock.