Question

Suppose that a luxury car dealership in Hong Kong wants to manage inventory for a spare part X better. The Japanese supplier lead time is 2 months; and dealership wants stock-out frequency < 1%. Assuming average monthly demand of 1000 units, and stdev. of 200 units.

What is the Reorder Point for the luxury car dealership?
Group of answer choices
a.3000
b.4350
c.2968
d.2658

Answer 1

The Reorder Point for the luxury car dealership in Hong Kong is calculated by adding the average demand during lead time to the safety stock. With a lead time of 2 months and a standard deviation of 200 units for the monthly demand, the Reorder Point comes out to be 2,658 units.

Step-by-step explanation:

To calculate the Reorder Point (ROP) for the luxury car dealership, we need to consider both the lead time demand and the safety stock, based on the desired service level. The Reorder Point formula is:

ROP = (Average demand during lead time) + (Safety stock)

Where:

• Average demand during lead time = Average monthly demand × Lead time in months
• Safety stock = Z-score corresponding to the desired service level × Standard deviation of monthly demand × √ Lead time in months

We have an average monthly demand of 1,000 units and a standard deviation of 200 units. The dealership's lead time for parts from the supplier is 2 months, and they want to ensure that the stock-out frequency is less than 1%. Looking up a standard normal distribution table, we find that the Z-score for a 99% service level is approximately 2.33.

So, the Reorder Point will be calculated as follows:

1. Average demand during lead time = 1,000 units/month × 2 months = 2,000 units
2. Safety stock = 2.33 × 200 units × √2 ≈ 658 units
3. ROP = 2,000 units + 658 units = 2,658 units

Therefore, the correct answer is (d) 2,658.