As the logistics representative on a manufacturer’s sales team, you have been asked to quantify the benefits that can be sold to a customer using more consistent service and transportation. The customer wants 99 percent case availability from its distribution centers that are re-supplied from the manufacturer. The average daily demand in cases from the customer’s DC is 1000 units with a standard deviation of 250. Historically, the replenishment performance cycle has been 10 days with a standard deviation of 4 days. The customer has traditionally used a 20 percent inventory carrying cost, and the average value of each case is $25. The customer orders weekly an order quantity of 7000 units.
a. What is the average inventory and annual carrying cost for the current situation?
b. What is the average inventory and carrying cost impact of reducing the manufacturer’s performance cycle variation by 2 days?
c. How does reducing the performance cycle variation by 2 days compare with reducing the average performance cycle length by 2 days in terms of average inventory and inventory carrying cost?