Final answer:
To calculate the Reorder Point (ROP), we need to consider the service level, lead time, and demand. The ROP for a 94% service level is 1247 cigars, and for a 91% service level, it is 1242 cigars. The service level represents the probability of not running out of stock during the lead time.
Step-by-step explanation:
To calculate the Reorder Point (ROP), we need to consider the service level, lead time, and demand. The Reorder Point is the number of units that should be in inventory when a new order is placed.
a) For a 94% service level, we need to determine the Z-score corresponding to that service level. From the Z-table, the Z-score for a 94% service level is 1.88. The ROP can be calculated as the average demand during lead time plus the safety stock. The safety stock is the Z-score multiplied by the standard deviation of demand during lead time:
ROP = (average demand during lead time) + (Z-score * standard deviation of demand during lead time)
ROP = 6 weeks * (200 cigars/week) + (1.88 * 25 cigars) = 1200 cigars + 47 cigars = 1247 cigars.
So, the ROP for a 94% service level is 1247 cigars.
b) For a 91% service level, we use the same formula, but with the corresponding Z-score of 1.69:
ROP = 6 weeks * (200 cigars/week) + (1.69 * 25 cigars) = 1242 cigars.
So, the ROP for a 91% service level is 1242 cigars.
c) The service level represents the probability of not running out of stock during the lead time. In this case, a 94% service level means there is a 94% probability of not running out of stock during lead time. Similarly, a 91% service level means there is a 91% probability of not running out of stock during lead time. The preferable service level depends on the consequences of running out of stock. A higher service level provides more assurance of not running out of stock but may require maintaining larger inventory levels. This can lead to higher costs. Therefore, the choice of service level should be based on balancing the costs and risks associated with stockouts.