Expected target availability level for items should be 95%. When the availability decreases, a penalty is incurred for example lost future sales. When the availability level decreases to 90%, the profit is reduced by 30% from the profit at the target level. Increasing the availability level and reducing the variability has significant implications on the supply chain, production and inventory-carrying costs. For every one percentage point that the availability is allowed to vary from the target level, the unit cost of supplying the item decreases by 6 cents. The price of the item is $15.95 and profit per Item sold at 95% availability is $2.
a. Estimate how much variability from the target availability percentage should be allowed. Use Taguchi LosS Function and explain each step of your calculation.
b. Explain two reasons why the cost of supplying the item decreases with every one percentage point that the availability is allowed to vary from the target level.