Question
Retailer X will buy a custom-built product from Supplier Y. From the suppliers perspective, the retailers order is a random variable with a normal distribution.
Retailer X will buy a custom-built product from Supplier Y. From the suppliers perspective, the retailers order is a random variable with a normal distribution. The mean of the order is =100 units, and the standard deviation is =10 units. The unit production cost for the supplier is $10. The retailer pays the supplier $20 per unit. If the supplier ends up producing more than what the retailer needs, the excess inventory will be sold at a discount price of $7. Suppose the production lead time is so long that the supplier must decide how much to produce before receiving the order from the retailer. What is the suppliers optimal production quantity? What is the suppliers service level at this production quantity?
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