Question

Weekly demand for the latest TV set at a retailer is normally distributed with a mean of 600 TVs and a standard deviation of 150. Currently, the store places orders to the supplier with a reorder point of 1,500 Tvs. Replenishment lead time is 2 weeks, fixed order cost per order is $200, each TV the retailer $300, and the inventory holding cost is 25% per year. If the retailer wants to achieve a 99% service level (use the z-value with one decimal, as in Table 13.4 of the textbook), what should be the safety stock value (whole number, no decimal)?

A) 460

B) 610

C) 510

D) 560

Answer 1

Solution: Safety stock is the stock held in excess of expected demand due to variable demand and /or lead time.

The formula for calculation of Safety Stock = z* Standard Deviation(weekly demand) *

Now, as per the values given in the question,

Z = +2.3 (using z-value table and based on service level of 99%)

Standard Deviation of weekly demand = 150 sets

Lead time for replenishment = 2 weeks

So, Safety stock = z* Standard Deviation(weekly demand) *

                        = 2.3*150* = 345 * 1.414= 488 TV sets (rounded up )

Conclusion: The closest answer based on above calculation is option C, which is 510.