Question

Case Study – Kyle Bits and Bytes

Kyle Bits and Bytes, a retailer of computing products sells a variety of computer-related products. One of Kyle’s most popular products is an HP laser printer. The average weekly demand is 200 units. Lead time (lead time is defined as the amount of time between when the order is placed and when it is delivered) for a new order from the manufacturer to arrive is one week.

If the demand for printers were constant, the retailer would re-order when there were exactly 200 printers in inventory. However, Kyle learned demand is a random variable in his Operations Management class. An analysis of previous weeks reveals the weekly demand standard deviation is 30. Kyle knows if a customer wants to buy an HP laser printer but he has none available, he will lose that sale, plus possibly additional sales. He wants the probability of running short (stock-out) in any week to be no more than 6%.

The case is on determining at which point a manager should re-order a printer so he or she doesn't run out-of-stock. The case uses normal distribution. The case demonstrates application of statistics in operations management

Case 2: Kyle Bits and Bytes

• What should be the re-order point? How many HP laser printers should he have in stock when he re-orders from the manufacturer?

Answer 1

Reorder point R = dL + z*σ*√d = 200/7

L = 7 days

σ = 30/7

z = 1.56

R = (200/7)*7 + 1.56*(30/7)* √7 = 200 + 17.69 = 217.69

Conclusion: Order will be placed when inventory level reaches 218 units.

A service level is 94% means, there is 0.94 probability that firm will meet demand time. It means, the probability of stock out is 6%.Safety stock = z*σ*√L

L = 7 days

σ = 30/7

z = 1.56

Safety stock =1.56*(30/7)* √7 = 17.69 = 18 units

Conclusion: 18 units safety stock of HP laser printer should be maintained to avoid stock out.