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Calibri Copy Formatting" Paste Format Painter Number Alignment Font Clipboard A4 | P301-Problem 10 The Internet Retail distributor from problem 9 has also decided to use the ROP system for determining when to place an order. The purchasing manager has determined that the monthly demand for crates of 24000 has a standard deviation of 2500. The current supplier of the boxes has a .5 month lead time. 3 1. If the manager wants a 90% customer service level on the crates, what should the ROP be for this item? 2. If the manager were to switch to a 95% customer service level how much more safety stock would be needed? 5 6 10 HW Problem 10

Explanation / Answer

1. Reorder point formula is:

R = D*L + Z*SD*(L)1/2

where R is reorder point,

D is average monthly demand,

L is the lead time

Z is the number of standard deviations corresponding to service level

SD is the standard deviation

For 90% service level, Z value is 1.645

So R = 24000*0.5 + 1.645*2500*(0.5)1/2

= 12000 + 2907.98

= 14907.98 = 14908

So reorder point for 90% customer service level is 14908 crates.

2. Safety stock is as calculated below:

SS = Z*SD*(L)1/2

where SS is the Safety Stock

Z is the number of standard deviations corresponding to service level

SD is the standard deviation

L is the lead time

Z value for 95% service level is 1.96

So SS = 1.96*2500*(0.5)1/2

= 3464.82 = 3465

So safety stock for 95% customer service level is 3465 stock.

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