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Inventory models: Planned shortage Model

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Playhouse World is distributor for a Victorian-style playhouse manufactured in Thailand. If the furm is out of stock of this playhouse,it offers customers a discount of $50 for each week they must wait for delivery. The administrative cost of processing a backorder is estimated to be $10. The playhouses cost the firm $3500 each and sell for $6000 each. Demand averages two units per month. Due to the fairly high cost of preparing customs documents, the cost of placing an order is estimated to be $1500 and an order takes approximately one month to arrive. Playhouse World estimates that the annual holding cost for the Victorian style playhouse is $450.

The company wishes to determine how many Victorian playhouses it should order and the approximate percentage of customers who will have to wait for delivery.

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The solution provides calculation of Optimal Inventory Policy for a Planned Shortage Model

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