Question

Jijo Restaurant is a low-key Indian restaurant selling various authentic Indian dishes. Jijo keeps an inventory of its best-selling desert Gulab Jamun, in the freezer and reorders as needed when inventory runs low. Specifically, Jijo’s rule of thumb is to place another order when there are only 80 Gulab Jamun left. Average daily demand is 23 units with a standard deviation of 8 units, and the average replenishment lead time is 2 days with a standard deviation of 1.2 days. Lately, Jijo has noticed that he runs out of Gulab Jamuns nearly three times a month, on average. Wanting to keep his customers happy, Jijo decides to strive for a 98% in-stock rate moving forward.

What is the Reorder Point?

Answer 1

The Reorder Point for Jijo Restaurant's Gulab Jamuns is at 133 units. This figure is calculated by adding the average demand during the average lead time to the safety stock required for a 98% in-stock rate, taking into account the variability in both demand and lead time.

Step-by-step explanation:

The Reorder Point (ROP) is the level of inventory which triggers an action to replenish that particular inventory stock. To calculate the Reorder Point for Jijo Restaurant's Gulab Jamuns, we need to consider both the average daily demand and the lead time, as well as their respective variabilities, in terms of standard deviation.

First, we calculate the daily demand during the lead time by multiplying average daily demand (23 units) by average lead time (2 days):

• Average demand during lead time = Average daily demand × Average lead time
• Average demand during lead time = 23 units/day × 2 days = 46 units

Next, to accommodate Jijo's desire for a 98% in-stock rate, we have to include safety stock, which accounts for variability in demand and lead time. For a 98% service level and the given standard deviations (8 units for demand and 1.2 days for lead time), we would use a Z-score corresponding to the 98% service level (about 2.05 based on a standard normal distribution table) and incorporate both standard deviations as follows:

• Safety Stock = Z-score × √((Average daily demand SD)^2 × (Lead time)^2 + (Average lead time SD)^2 × (Daily demand)^2)
• Safety Stock = 2.05 × √((8 units)^2 × (2 days)^2 + (1.2 days)^2 × (23 units/day)^2)
• Safety Stock = 2.05 × √(1024 + 794.64)
• Safety Stock ≈ 2.05 × 42.38
• Safety Stock ≈ 86.97 units (rounded to 87 units)

Therefore, the Reorder Point is the sum of the average demand during lead time and the safety stock:

• Reorder Point = Average demand during lead time + Safety Stock
• Reorder Point = 46 units + 87 units
• Reorder Point = 133 units

Jijo Restaurant should reorder Gulab Jamuns when the inventory level reaches 133 units to achieve a 98% in-stock rate.