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Choose the right answer: A product’s usage is normally distributed with average demand of 400 units/day...

Choose the right answer:

A product’s usage is normally distributed with average demand of 400 units/day and a weekly standard deviation of 125. The product’s lead time is 20 days. Currently, the reorder point for this product is 8,200. The company work 5 days per week. If the company would like to have a service level of 95% for this product then

A. it must decrease its safety stock by approximately 412 units.

B. it must decrease its safety stock by approximately 212 units.

C. it must increase its safety stock by approximately 412 units.

D. it must increase its safety stock by approximately 212 units.

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Answer #1

Average Demand/day = 400 units

Average demand/week d = 400*5 = 2000 units

Weekly standard deviation per week σ = 125 units

Lead Time = 20 days = 20/5 = 4 weeks

Reorder Point ROP = 8200 units

ROP = Average demand during lead time+Safety Stock

8200 = d*L+SS = 2000*4+SS

SS = 8200 - 8000 = 200 units

Based on new Service level 95 % => z= 1.645

Safety Stock = z*σ*√L = 1.645*125*√4 = 412 units(approx)

Increase in safety stock = 412-200 = 212 units

Answer is - D) it must increase its safety stock by approximately 212 units

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