Service Management: Operations, Strategy, Information Technology 8th Edition by James Fitzsimmons,Mona Fitzsimmons,Sanjeev Bordoloi

Exercise 16

Leapyear Tire is interested in carrying insufficient numbers of budget tires deliberately. If a customer finds a budget tire is not available, a salesperson will try to sell a more expensive substitute tire, but if this strategy fails, the customer is placed on a waiting list and notified when the next order arrives from the distributor. Leapyear Tire wishes to design an ordering system that will allow backorders to accumulate to a number approximately one-tenth the size of the replenishment order quantity at the time the delivery arrives from the distributor. The cost to hold a tire in stock for a year is $2 and the cost to place an order with the distributor is $9.
a. What is the implied cost of backordering a customer?
b. What would be the recommended order quantity for a 195HR14 tire with an annual demand of 1,000?