A company stocks a component that cost $40 per unit. Annual demand for the item

Question

A company stocks a component that cost $40 per unit. Annual demand for the item is 3120 units. The company is open for business 52 weeks per year, so weekly demand averages 60 units, with a standard deviation of 10 items. Past experience with their supplier indicates that the replenishment lead time (the time from ordering more items to receipt of the shipment of those items) is 9 weeks. A 90% service level is desired, so the safety factor (from a standard normal distribution table) is 1.30. What reorder point should be used?

Explanation / Answer

If the average daily usage rate of a material is 50 units and the lead-time is seven days, then: Reorder level = Average daily usage rate x Lead time in days = 50 units x 7 days = 350 units When the inventory level reaches 350 units an order should be placed for material. By the time the inventory level reaches zero towards the end of the seventh day from placing the order materials will reach and there is no cause for concern. Re-order point = Average Lead Time*Average Demand + Service Level*SQRT(Avg. Lead Time^2*Standard Deviation of Demand^2 + Avg. Demand^2*Standard Deviation of Lead Time^2) More information on above formulation is given here: http://scm.ncsu.edu/scm-articles/article/reorder-point-formulainventory-management-models-a-tutorial Reorder point = S x L + J ( S x R x L) Where S = Usage in units per day L = Lead time in days R = Average number of units per order J = Stock out acceptance factor The stock-out acceptance factor, `J', depends on the stock-out percentage rate specified and the probability distribution of usage (which is assumed to follow a Poisson distribution)

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