Harvey’s Specialty Shop is a popular spot that specializes in international gourmet foods. Oneof the items that Harvey sells is a popular mustard that he purchases from an English company.The mustard costs Harvey $10 a jar and requires a six-month lead time for replenishment ofstock. Harvey uses a 20 percent annual interest rate to compute holding costs and estimatesthat if a customer requests the mustard when he is out of stock, the loss-of-goodwill cost is $25a jar. Bookkeeping expenses for placing an order amount to about $50. During the six-monthreplenishment lead time, Harvey estimates that he sells an average of 100 jars, but there issubstantial variation from one six-month period to the next. He estimates that the standarddeviation of demand during each six-month period is 25. Assume that demand is described bya normal distribution. How should Harvey control the replenishment of the mustard?

Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
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Harvey’s Specialty Shop is a popular spot that specializes in international gourmet foods. One
of the items that Harvey sells is a popular mustard that he purchases from an English company.
The mustard costs Harvey $10 a jar and requires a six-month lead time for replenishment of
stock. Harvey uses a 20 percent annual interest rate to compute holding costs and estimates
that if a customer requests the mustard when he is out of stock, the loss-of-goodwill cost is $25
a jar. Bookkeeping expenses for placing an order amount to about $50. During the six-month
replenishment lead time, Harvey estimates that he sells an average of 100 jars, but there is
substantial variation from one six-month period to the next. He estimates that the standard
deviation of demand during each six-month period is 25. Assume that demand is described by
a normal distribution. How should Harvey control the replenishment of the mustard?

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