Purchase Solution

Inventory management-implied shortage cost

Not what you're looking for?

Ask Custom Question

Question: The policy in a military base is to have 99.7% "service level" for vehicle spare parts. If the base is short of any part, it can get it from a central warehouse in one week. Assume it costs 1 % of value of the part to carry it in inventory for a week. (For example, if a part costs $200, its inventory carrying cost is $2 per week).

What is the implied "shortage cost" for a part that costs $1000 under this policy? What is it for a part that costs $20? What are the pros and cons of this policy?

Purchase this Solution
Solution Summary

The solution calculates the implied shortage cost for an inventory policy to have 99.7% "service level" for vehicle spare parts.

Solution Preview

See the attached file.
It is economical to hold an additional unit in safety stock as long as its holding cost is no greater than the expected shortage cost for one additional unit short.

This means h= (1-alpha )P
or implied shortage cost = P= h / (1-alpha )
where h= holding cost
P= ...

Purchase this Solution
Free BrainMass Quizzes
Learning Lean

This quiz will help you understand the basic concepts of Lean.

Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Introduction to Finance

This quiz test introductory finance topics.

View More Free Quizzes
Related BrainMass Solutions

  • Production Management: Inventory System Costs

    Manufacturing planning and control systems for supply chain management. (5th ed.). McGraw-Hill Professional. This solution defines inventory system and discusses ordering cost, shortage cost, production cost, and holding cost.

  • inventory

    (Note: each dollar of missing inventory at cost is a dollar less of gross profit, then net profit, also.) Calculating Shortage Let's tackle the easily traceable causes of shortage.

  • Operations Management -- Inventory

    Operations management for inventory is examined.

  • Inventory shortage cost

    Opportunity cost of capital invested in inventory Which of the following is a type of inventory shortage cost? Which of the following is a type of inventory shortage cost? C.

  • EOQ, lead time demand information;safety stock;reorder point

    308399 Given the following information, formulate an inventory management system.

  • Controllable Inventory Costs

    Dissatisfied customers, lost sales, and loss of reputation occurs when there is a shortage. Step 2 The most controllable cost by the organization is the holding cost of inventory.

  • Working Capital Management

    The working capital management for Jackson Electronics Inventory are examined.

  • Economic Order Quantity: Doritos and Pepsi

    What is the target inventory level (T) for each item? Over 100 order cycles, how many would you expect to end with an inventory shortage?

  • A Manufacturer's Production Policy

    232497 A Manufacturer's Production Policy The manufacturer of a particular bicycle model has the following costs associated with the management of the product's inventory.

View More Related Solutions