Question

1. Daily demand for a certain product is normally distributed, with a mean of 200 and a standard deviation of 25. The supplier is reliable and maintains a constant lead time of 4 days. The cost of placing an order is $10 and the cost of holding inventory is $0.50 per unit per year. Consider service level of 90%.

2. What is the required safety stock?

   a.) 64 b.) 85 c.) 75 d.) 54

3. What is the reordering point?

   		864
   		762
   		575
   		666

4. What happens to the reordering point if the service level is 95%?

   		No change
   		Decrease
   		Increase
   		Cannot be determined

Answer 1

DEMAND = 200
STDEV DEMAND = 25
SERVICE LEVEL = 90, CORRESPONDING Z VALUE 1.29
LEAD TIME = 4

1. A. 64

SAFETY STOCK = Z * STANDARD DEVIATION OF DEMAND * SQRT(LEAD TIME)

SAFETY STOCK = 1.29 * 25 * SQRT(4) = 64

2. A. 864

REORDER POINT = (DEMAND * LT) + SAFETY STOCK

ROP = (200 * 4) + 64 = 864

3. C. INCREASE

SAFETY STOCK = 1.65 * 25 * SQRT(4) = 82

SINCE SAFETY STOCK WILL INCREASE WITH AN INCREASED SERVICE LEVEL, ROP WILL INCREASE AS WELL.

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