Question

a) In the case of continuos demand, the safety stock increases with the standard deviation, SD, of demand at a constant rate. T/F ?

b) If total demand across 16 nodes is pooled, the square root law would indicate that only 1/8 of the total safety stock is needed at a central location to support the same customer service level. T/F?

c) postponement results in more disaggregate forecasts for end product. T/F?

Answer 1

a) True

Safety stock = z*s*L

z = service level

s = standard deviation

L = lead time

We can see that safety stock and standard deviation are directly propotional. Hence, safety stock increases with the standard deviation at a constant rate.

b) False

Safety stock = z*s*L

assuming that standard deviation of all these 16 nodes are equal, we cannot add the standard deviation directly

We need to square them to find the variance.

variance = s²

now adding all variances = s² 16 times = 16s²

final standard deviation of central location = 16s²? = 4s

total safety stock for 16 locations = 16*z*s*L

safety stock for central location = z*4s*L

We can see that safety stock for central location is 1/4 of total 16 nodes.

Hence False

c) True

Delay or postponement implies that the forecast initially was more aggregate, but now it is dis aggregate. Hence postponement results in more disaggregate forecasts for end product.