29. A product\'s usage is normally distributed with a weekly average demand of 2

Question

29. A product's usage is normally distributed with a weekly average demand of 200 units and a weekly standard deviation of 125.The product's lead time is 4 week Currently, the reorder point for this product is 8,200. If the company would lik have a service level of 95% for this product, then it must A) Decrease its safety stock by approximately 412 units B) Decrease its safety stock by approximately 118 units C) Increase its safety stock by approximately 118 units D) Increase its safety stock by approximately 210 units E) Decrease its safety stock by approximately 212 units

Explanation / Answer

Answer:

Correct choice is:

D) Increase its safety stock by approximately 210 units

Safety stock = Z * Standard deviation over lead time

where Z = Z score

When Service level = 95%, z= 1.644854

Standard deviation over lead time = Sqrt (4) * standard deviation per week = 2 * 125 = 250

Safety stock = 1.644854 * 250 = 411

Current re-order point = 8,200 and

Lead time demand = 4 weeks * 2000 = 8000 units

Current safety stock = 200 units

Hence to maintain 95% service level, safety stock need to be increased by approximately 210 units.

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