Question

Mine equipment and design (MED) LLC is a global mining equipment company. Recently an internal memo from the CEO to all operation complaints about the budget overruns at its central warehouse. In particular she said that inventories were too high and that the budget will be cut dramatically and proportionately equal for all items in stock. Consequently, warehouse management setup a pilot study to see what effect the budget cuts would have on customer service, they choose ,an equipment part that consumes considerable warehouse space. Daily demand for this part is 1000 units with standard deviation of 150 units. Ordering costs are 40$ per order. Holding cost are 2$ units/year. The supplier is located in Philippines, consequently, the lead time is 35 days with a standard deviation of 5 days. MED LLC operats 313 days Suppose that S-CJ4504is allocated a budget of 16000$for total annual costs. Themed uses a continuous review system for this par and cannot change the ordering cost or the distribution of demand or lead time, What is best cycle service level (the desired probability of not running out of stock in any one ordering cycle) management can expect from their system ? Determine the standard deviation of demand during lead time.

Answer 1

The best cycle service level and the standard deviation of demand during lead time can be calculated using formulas.

Step-by-step explanation:

The best cycle service level that management can expect from their system is calculated using the formula:

Service level = 1 - z * (sqrt(L) * sqrt(Q) / D)

Where z represents the number of standard deviations of demand required, L is the lead time in days, Q is the order quantity, and D is the daily demand.

In this case, the desired probability of not running out of stock in any one ordering cycle is not provided. Therefore, it cannot be determined what the best cycle service level is.

The standard deviation of demand during lead time can be calculated using the formula:

Standard deviation of demand during lead time = sqrt(L) * SD(D)

Where L is the lead time in days and SD(D) is the standard deviation of daily demand.

In this case, the lead time is 35 days and the standard deviation of daily demand is 150 units. Therefore, the standard deviation of demand during lead time is sqrt(35) * 150 = 750 units.