Question

A company has average demand of 30 units per day. Lead time from the supplier averages seven days. Assume that the combined standard deviation of demand during lead time has been calculated and is equal to 20 units. One unit costs $10 and the inventory carrying cost is 25 percent. 1 standard deviation covers 84.13% 1.04 standard deviations covers 85% 1.28 standard deviations covers 90% 1.65 standard deviations covers 95% 1.96 standard deviations covers 97.5% 2 standard deviations covers 97.72% 2.33 standard deviations covers 99% 3 standard deviations covers 99.86% 6 standard deviations covers 99.99966% What is the reorder point for the company if it decides on a 99 percent service level?

Answer 1

Re-order quantity = 256.6 or 257 units

Step-by-step explanation:

We can calculate the reorder point for the company at 99% service level as follows

Solution

The Standard deviation of demand during lead time = sigma

Average daily demand = d

lead time = L

Standard deviation covered 99% = Z

DATA

Sigma =20 units

d= 30 units per day

L= 7 days

Z= 2.3

Calculation

Reorder quantity = (d x L) + (Z x sigma)

Reorder quantity = (30x7) + (2.33 x 20)

Reorder quantity = 210 + 46.6

Reorder quantity = 256.6 or 257 units