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Consider a periodic review inventory system with a lead time of two weeks and a review...

Consider a periodic review inventory system with a lead time of two weeks and a review period of seven weeks. The standard deviation of weekly demand is 20 and the desired service level is 86%. Annual demand is 36,000 units and there are 50 weeks in the year. Currently, on hand inventory is 630 units. What should be the order quantity?

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Answer #1

Weekly demand = Annual demand /50 weeks = 36000/50 = 720

Protection interval = Review period + lead time = 7 + 2 = 9 weeks

Z value of service level = NORMSINV ( 0.86 ) = 1.080

Standard deviation of weekly demand = 20

Safety stock requirement = Z value x standard deviation x Square root ( Protection interval )

= 1.080 x 20 x square root ( 9)

= 1.080 x 20 x 3

= 64.80

Order quantity

= Weekly demand x Protection interval + safety stock – 630 on hand inventory

= 720 x 9 + 64.80 – 630

= 6480 + 64.80 – 630

= 5914.80

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