PRACTICE QUESTION

Green Giant distributes boxes of canned beans. Green Giant receives monthly deliveries from its supplier, who replenishes the boxes up to a level that Green Giant is free to specify. Green Giant buys the boxes at $450 each and sells them for $600 each to its wholesaler customers. The annual inventory carrying charge is 20%. Monthly demand of boxes is normally distributed with mean 3,500 and standard deviation 400. Green Giant management wants to limit the probability of a stock-out on any given month to to 9%.

(a) What value of a replenishment level would you recommend?

(b) What is Green Giant's annual cost of holding safety stock?

(c) What is Green Giant's average level of cycle stock?