Inventory Item Average Demand (Annual) Sigma (Std. Dev.) of Demand During Lead T
ID: 464275 • Letter: I
Question
Inventory Item
Average Demand (Annual)
Sigma (Std. Dev.) of Demand During Lead Time
Item Unit Cost
F-11001
15,000
100
$250.00
K-12002
100,000
300
$2.00
L-13003
250,000
200
$0.20
N-14004
300,000
400
$1.00
P-21001
50,000
60
$125.00
S-22002
80,000
75
$30.00
Note: All items are independent demand items.
Based on the above data: Calculate the safety stock quantities and the inventory cost associated with safety stock (based on the item unit cost) for the inventory items at four different service levels (50%, 80%, 90%, and 95%).
Develop a table to present the inventory quantities and the safety stock costs at each service level.
Assuming that demand occurs at a steady pace every month (in other words, there is no seasonality or cyclical change in the level of demand), calculate the reorder point for each item assuming a lead time of two months and a service level of 90%.
Develop a table to present the reorder points for all products under these conditions (two month lead time and service level of 90%).
Support your responses with examples.
Inventory Item
Average Demand (Annual)
Sigma (Std. Dev.) of Demand During Lead Time
Item Unit Cost
F-11001
15,000
100
$250.00
K-12002
100,000
300
$2.00
L-13003
250,000
200
$0.20
N-14004
300,000
400
$1.00
P-21001
50,000
60
$125.00
S-22002
80,000
75
$30.00
Explanation / Answer
For each of the items, we obtain the Z score from the different Service Levels then calculate the Quantity Needed by substituting
z = (X - Mean)/ SD
Where Z is obtained from the Z table
X is the Quantity
Mean is the Mean Annual Demand
SD is the Standard Deviation
Reorder Point = Lead Time Demand + Lead Time Safety Stock
= X (90%)/6 (X is the Annual Quantity), so divided by 6 gives the quantity during the lead time.
Service Level = 50% Service Level = 80% Service Level = 90% Service Level = 95% Inventory Item Average Demand (Annual) Sigma (Std. Dev.) of Demand During Lead Time Item Cost z X Safety Stock Inventory Cost z X Safety Stock Inventory Cost z X Safety Stock Inventory Cost z X Safety Stock Inventory Cost F-11001 15,000 100 $250 0 15,000 0 0 0.8416 15084 84 $21,040 1.2816 15128 128 $32,040 1.6449 15164 164 $41,122 K-12002 100,000 300 $2 0 100,000 0 0 0.8416 100252 252 $505 1.2816 100384 384 $769 1.6449 100493 493 $987 L-13003 250,000 200 $0.20 0 250,000 0 0 0.8416 250168 168 $34 1.2816 250256 256 $51 1.6449 250329 329 $66 N-14004 300,000 400 $1 0 300,000 0 0 0.8416 300337 337 $337 1.2816 300513 513 $513 1.6449 300658 658 $658 P-21001 50,000 60 $125 0 50,000 0 0 0.8416 50050 50 $6,312 1.2816 50077 77 $9,612 1.6449 50099 99 $12,337 S-22002 80,000 75 $30 0 80,000 0 0 0.8416 80063 63 $1,894 1.2816 80096 96 $2,884 1.6449 80123 123 $3,701Related Questions
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