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    Determining Safety Stock

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    1. Describe the methods that are used in determining safety stock when the stockout cost is known and when the stockout cost is unknown (with reference).

    2. Discuss the major inventory costs that are used in determining the EOQ (with reference).

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    SAFETY STOCKS AND INVENTORY COSTS

    Methods used in determining safety stock when the stockout cost is known and when the stockout cost is unknown.
    The main purpose of a safety stock is to avoid stockouts when demand is more than the company's expectations.
    A possible way of determining safety stock is to integrate it into the reorder point which is the level of inventory that signals the need to order for stocks. Reorder point is normally computed by multiplying the estimated demand by the order lead time. The main concept behind the reorder point is that the level of inventory must be enough until such time the ordered inventory is available. The safety stock is the amount/volume of inventory that is normally added to the reorder point. The safety stock would allow the company to cope with possible unexpected increase in demand.
    However, demand estimates cannot be expected to be perfect. Hence, there is the chance that there will still be stockouts.
    To compute the ...

    Solution Summary

    The solution describes the methods that are used in determining safety stock when the stockout cost is known and when the stockout cost is unknown.

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