Question

(a) The demand for item X is estimated to be normally distributed with a mean demand of 300 units per day and a standard deviation of 20 units per day. What is the reorder point and safety stock under continuous review policy? (Assume 95% service level, z (0.95) =1.65)

(b) The supplier has changed. All costs remain the same, but lead time changes from 3 days to 30 days.What would be the new reorder point and safety stock? What do you observe?

(c) If the inventory manager decides to move from a continuous review policy to a periodic review policy. What will be the base stock level for the change? Consider lead time to be 3 days, and review period to be 7 days).

Answer 1

a) Safety stock

= Z value x standard deviation of demand x square root ( Lead time )

= 1.65 x 20 x Square root ( 3 )

= 57.157

Reorder point = Mean demand / day x Lead time ( days) + safety stock

                           = 300 x 3 + 57.157

                            = 900 + 57.157

                              = 957.157

b) New safety stock

= 1.65 x 20 x Square root ( 30 )

=180.748

Reorder point =Mean demand/ day x Lead time ( days) + Safety stock

= 300 x 30 + 180.748

= 9000 + 180.848

= 9180.848

Both safety stock and reorder points have increased

c) Lead time = 3 days , review period = 7 days

Protection period = 3 + 7 = 10 days

Safety stock = 1.65 x 20 x square root ( 10 ) = 104.35

Reorder point = Mean demand /day x Protection period + Safety stock

                            = 300 x 10 + 104.35

                            = 3000 + 104.35

                              = 3104.35

Base stock level should b at 3104.35