You are buying your first house and using your Aunt Tillie\'s title agency for t

Question

You are buying your first house and using your Aunt Tillie's title agency for the legal processing. She complaints that her office is frequently running out of paper which drives her nuts because that's perhaps the most used item in her office.

You tell her that you've taken this course and can help her figure out how much extra paper to buy to reduce the chance of running out. She says she'd like to never run out, but you tell her that realistically she should consider running out of paper only about 1% of the time, and she says "Fine, whatever - just tell me how much extra to order each month".

If her office uses an average of 283 reams of paper per month with a standard deviation of 12.8 reams of paper, how big should her safety stock be to allow only a 1% chance of running out of paper each month?

(Keep two decimal places in your answer)

Explanation / Answer

The formula for calculating safety stock = desired service level (service factor) × square root (standard deviation of demand2 * avg lead time in months)

Here, only 1% chance of running out means service level of 99%. We have to find out corresponding service factor. Considering normal distribution, service factor for 99% is 3.72

We will consider 1 month lead time

Hence safety stock = 3.72* square root (1*12.82)=47.62 reams of paper

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