Assume an organization’s current service level on order fill is as follows:
Current order fill = 70%
Number of orders per year = 10,000
Percent of unfilled orders back-ordered = 85%
Percent of unfilled orders cancelled = 15%
Back order costs per order = $100
Lost pretax profit per cancelled order = $15,000
a. What is the lost cash flow to the seller at this 70 percent service level?
b. What would be the resulting increase in cash flow if the seller improved order fill to 85 percent?
c. If the seller invested $2 million to produce this increased service level, would the investment be justified financially?