Problem
Scenario
A distributor of computer monitors purchases the monitors from an overseas supplier under a continuous review system. The average demand for a popular computer monitor is normally distributed with a mean of 50 units a day and a standard deviation of10 units a day. It costs $75 to process each order and there is a 16 day lead time. The holding cost for each monitor is $20 per year and the distributor wishes to maintain a 90% service level. The distributor operates 300 days in a year.
Use the information in Scenario. What is the annual cost of holding the safety stock necessary to maintain the 90% service level?