SINGLE-PERIOD INVENTORY DECISION. Chris Ellis’s newsstand, just outside the Smithsonian subway station in Washington, DC, usually sells 120 copies of the Washington Post each day. Chris believes the sale of the Post is normally distributed, with a standard deviation of 15 papers. He pays 70 cents for each paper, which sells for $1.25. The Post gives him a 30-cent credit for each unsold paper. He wants to determine how many papers he should order each day and the stockout risk for that quantity.
APPROACH \blacktriangleright Chris’s data are as follows:
C_s = cost of shortage = $1.25 – $.70 = $.55
C_o = cost of overage = $.70 – $.30 (salvage value) = $.40
Chris will apply Equation (12-18) and the normal table, using µ = 120 and σ = 15.
Service level = \frac{C_s}{C_s + C_o} (12-18)
