A newspaper boy is trying to perfect his business in order to maximize the money he can save for a new car. Daily paper sales are normally distributed, with a mean of 100 and standard deviation of 10
He sells papers for $0.50 and pays $0.30 for them. Unsold papers are trashed with no salvage value. How many papers should he order each day and what % of the time will he experience a stockout? Are there any drawbacks to the order size proposed and how could the boy address such issues?
Service level = Cs/(Cs + Co) = .2/(.2+.3 ) = .4
Z value for this service level is -.25 (read the value for .6 on the one-sided table and reverse its sign (since .6 - .5 = .1 and we want .5 - .1 = .4).
Thus he should stock 100 + (-.25 )(10 ) = 97.5 = 98 papers
If service level is 40% he will experience stockout 1-Service level % of the time = 100% - 40% = 60% of the time will be a stockout
The main drawback is the high % of the time that there will be a stockout. Customers could become unhappy and demand could plummet. Thus the boy must be careful to balance his optimum order size with one that will keep customers satisfied. Increasing the salvage value would go a long way to increasing the ideal service level.
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