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The management policy of a certain company is to never run out of stock. The sales department carried out an analysis of a particular item to evaluate this policy.

The management policy of a certain company is to never run out of stock. The sales department carried out an analysis of a particular item to evaluate this policy. The demand is deterministic and constant over time at 625 units per year. The unit cost of the item is $50 independent of the quantity ordered. The cost of placing an order is $5.00, and the annual inventory carrying charge is i = 0.20. Units can be backordered at a cost of $0.20 per unit per week. Calculate the optimal operating doctrine under the assumption that no stockouts are allowed and also that units can be backordered at the cost indicated above. What is the $ loss per year caused by the no-stockout policy if the sales department has correctly estimated the pertinent parameters?

 

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