Question

The operations manager at a chemical company that produces insecticide for use in commercial applications is attempting to set a safety stock level for a key ingredient that is used in their most powerful product. She believes that demand during lead time for this ingredient is normally distributed based on past data. In addition, she believes that future use is accurately depicted by these historical demand-duringlead-time data (in gallons): 55, 75, 75, 70, 80, 60, 50, 70, 60, and 85. She estimates the standard deviation of demand during the lead time to be 8.5 gallons.

a. What is the average demand during the lead time for this key ingredient?
b. What is the safety stock they need to provide a 95% service level?
c. What is the order point the company should use?

Answer 1

a) Average demand during the lead time = Sum of all the historical demand during lead time / Number of periods

= (55+75+75+70+80+60+50+70+60+85) / 10

= 680 / 10

= 68 gallons

b) Standard deviation of demand during lead time(\sigmadL) = 8.5 gallons

At 95% service level,value of Z = 1.65

Safety stock = Z(\sigmadL) = 1.65(8.5) = 14.03 gallons

c) Reorder point = Average demand during the lead time + Safety stock

= 68 + 14.03

= 82.03 gallons