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Confederate Pulp and Paper
Confederate Pulp and Paper
Cs, or the cost of being short in inventory, was calculated as the difference
between the cost of cutting the wood and what the farmers charged. The farmers
charged $65. For the cost of supplying wood, we added the unit cost of $47.50 with
$8.00 of shipping (since every piece of timber is shipped). We debated whether to
add the $2 holding charge, but since every piece of wood would be held in the
winter we included it. Thus, Cs =$65-($47.50+$8+$2).
In order to calculate, Ce, we used this equation.
However, we quickly realized we did not have Q, or the total ordering and
holding cost per period. So we used the Q equation
numbers. Since S is the supply cost, we simply used $47.50 + $8.00 for $55.50. For
H, we employed the formula H = ic +v. These were all supplied in the case (v=23,
i=20% and c=$2).
Eventually we calculated Q.
This gave us all the variables needed for the service level equation.
To then determine at what service level we would find the optimal stocking
level for winter, we created a demand frequency table (see below) from the
historical data given in Exhibit 1. We figured that the difference each year between
the pile in the fall and the pile in the spring replicated demand, since thats what was
sold. We then arranged each year by demand and calculated the cumulative
probability. The place where optimal service leveled equaled cumulative probability
would give us the amount to pile up in the winter. Because the .585 service level
falls between the cumulative probabilities of 0.5 and 0.66, we want to stock up to
ensure we cover the service level. As a result, we chose the 1982-83 year with a
demand of 88,000. So, the company should be sure to pile up 88,000 units of the
timber in the winter.
Pile: Fall
Pile: Spring
Difference
Re-ordered
Difference
Probability
Cumulative
Probability
1982-83
100
12
88
82
0.1666666
0.1666666
1983-84
100
112
85
0.1666666
0.333333
1984-85
125
40
85
86
0.1666666
0.5
1985-86
113
27
86
88
0.1666666
0.666666
1986-87
110
105
105
0.1666666
0.833333
1987-88
110
28
82
112
0.1666666
1.0