Problem
The Cleanco Chemical Company sells cleaning compounds (dishwashing powders, floor cleaners, nonpetroleum lubricants) in a keenly competitive environment to restaurants, hospitals, and schools. Delivery time on orders determines whether a sale can be made. The distribution system can be designed to provide different average levels of delivery time through the number and location of warehousing points, stocking levels, and order processing procedures. The physical distribution manger has made the following estimates of how service affects sales and the cost of providing service levels.
|
|
Percentage of Orders Delivered Within one Day
|
|
50
|
60
|
70
|
80
|
90
|
95
|
100
|
|
Estimated annual sales (millions of $)
|
4.0
|
8.0
|
10.0
|
11.0
|
11.5
|
11.8
|
12.0
|
|
Cost of distribution (millions of $)
|
5.8
|
6.0
|
6.5
|
7.0
|
8.1
|
9.0
|
14.0
|
a) What level of service should the company offer?
b) What effect would competition likely have on the service level decision?