Given this information: Lead-time demand = 640 pounds Standard deviation of lead

Question

Given this information: Lead-time demand = 640 pounds Standard deviation of lead time demand = 50 pounds (Assume normality.) Acceptable stockout risk during lead time = 4 percent

What amount of safety stock is appropriate?

When should this item be reordered?

What risk of stockout would result from a decision not to have any safety stock?

What amount of safety stock is appropriate?

When should this item be reordered?

What risk of stockout would result from a decision not to have any safety stock?

Explanation / Answer

Safety stock = z * st. dev. Of demand * sqrt (L)

where z is the number standard deviation of 96% services level it is 1.76 (as Acceptable stock out risk during lead time = 4 percent)

Standard deviation of lead time demand is 50 pounds

Therefore safety stock = 1.76 * 50 = 88 pound

Reorder point = lead time demand + safety stock

Where

R is the reorder point =?

Lead time demand is 640 pound

Now,

Reorder point = lead time demand + safety stock = 640 + 88

= 728 pound is the reorder point

If there is no safety stock in that case the reorder point will be average lead time demand which is 640 pounds. This will result in stock out probability = 50 %

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