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he best economic choice occurs at the point where the sum of both costs is lowest. (dashed line) (a)setting the customer service level ?improved customer service level will reduce lost sales cost. ?improved service usually means that more must be paid for transportation, order processing and inventories. (b)Determining the number of warehouses in a logistics system. When the number of stocking points is increased (1) transportation costs decline. (2) inventory costs rise. (c) Setting safety stock levels When safety stock is increased: (1) customer service ? (2) inventory carrying cost ? (3) lost sales cost ? (4) transportation costs remain relatively unaffected. (d) Setting the sequence of production runs for multiple products As the production sequence is changed. carrying cost ? (mass production) costs ? (setup times ? changeover cost ?) Box Application ? Marine products manufacturer constructing a warehouse in St. Louis ? Consider transportation costs minimize ? Consider inventory costs minimize ? Constructing warehouse in Chicago. ? Final, the partially constructed warehouse and move the inventory to Chicago Differentiated distribution ? Not all products should be provided the same level of customer service. ? Different customer service requirement, different product characteristics, and different sales levels. ? Inventory location. ? Transportation rate (vehicle – load volumes) ? Sales volume. ?Fastmoving items ? forward locations in the distribution channel. ?Medium – volume items ? in fewer regional locations. ?Slow – moving items ? centralized stocking points such as plants. Differentiated distribution ?See Box application. ?A small specialty chemical pany. ?All products were produced at a single location. ?All large customer orders (top 10% of the pany’ s volume), will to be shipped direct to customers from the plant. ?Other small shipment sizes, were to be shipped out