SCM HW1.

Inventory Problem

Current demand for product X is 2,000 units per week with a sd = 450. The product is manufactured in
house and has a cost of $4/unit (cu). The ordering/setup cost (cs) is $900 per order. The lead time is 3
weeks (L) with a deviation of 0.5 weeks (sL). The carrying cost rate is 25%. Assume 52 weeks per year.

The idea of outsourcing production is being considered. The lead time would be 6 weeks (L) and the
deviation is estimated at 2 weeks (sL). The outsourcer would accept orders that are 35,000 units or
higher (this is the minimum order size, but any amount larger than 35,000 is acceptable as the order
size). They would charge $3.8 per unit (cu) and the costs per order would be $3,000 per order (cs).

Question 1. Should they outsource if TSL = 93%?

Question 2. What about at TSL = 99.99%?
Bonus Question. At what TSL are both options equivalent?