Krishna Cables requires aluminium for its factory .

The probability distributions of the daily usage rate and the lead time for procurement are given below. (These distributions are independent.)

Daily Usage Rate in Tonnes

Probability

Lead time in Days

Probability

2 3 4

0.2 0.6 0.2

25 35 45

0.2 0.5 0.3

The stockout cost is estimated at Rs 8,000 per tonne and the carrying cost in Rs 2,000 per tonne per year. Required: (a) What is the optimal level of safety stock ? (b) What is the probability of stock out ?

(a)The normal usage is :

[Average daily usage ] [Average lead time in days ]

[2(0.2) + 3(0.6) + 4(0.2)] [25(0.2) +35(0.5)+45(0.3)] = [3.0] [36.0] = 108 tonnes
0

The possible levels of usage which are higher than 108 tonnes are underlined in the third column of the following table . The safety stock required to meet these levels of usage is shown in the last column of the following table. The possible levels of the usage are shown below

Daly usage rate

Lead time in days

Possible levels of usage

Safety Stock

25 35 40

50 70 80

25 35 45 25 35 45

75 105 135 100 140 180

27

32 72

The stockout cost, carrying cost ,and total cost for the different levels of safety stock are shown bellow :
Safety stoke (tonnes) Stockout Stockout cost (Rs) Probability Expected stock out cost Carrying cost Total cost

72 32 27

0 40 45 5

0 Rs 320,000 Rs360,000 Rs40,000

0 0.06 0.06 0.10

0 Rs 19,200 Rs21,000 Rs4,000 25,600

Rs144,000 64,000 54,000

Rs 144,000 83,200 79,600

72

Rs576,000

0.06

34,560

98,960

32
27

Rs256,000
Rs216,000

0.10
0.18

25,600
38,800 98,960

The optimal level of safety stocks is 27 tonnes because at that level the cost is Minimised. (b) The probability of stockout when the safety stock is 27 tonnes is : (0.06+0.10)=0.16