ailer. The number may seem high but we must consider that on-order inventory will be subtracted to begin with. Because of the lead times in the system, the retailer will have three weeks supply on-order at any time. This amount will be subtracted out of the base-stock quantity before the order quantity id calculated. The distributor and warehouse are better off with lower bases-tock numbers, mainly because they dont incur any penalty cost for shortages. However, when they are short, the retailer is more likely to become short and incur the huge penalty fee for shortage. This will effect the chain in a negative way and so it necessary to balance the cost of the distributor and the warehouse paying holding fees and the retailer paying shortage penalties. The factory is very similar to the distributor and the warehouse, except that it has a shorter lead-time and lowest holding cost. I found the optimal policy when the factory used a base stock quantity of 150. The shorter lead-time from the factory to its supplier enables them to respond better to changes in demand and reduced the chance of a stock-out. ...
