Question

A company wants to determine its reorder point (R). Demand is variable and they want to build a safety stock into R. The company wants to have a service level of 95 percent. If average daily demand is 8, lead time is 3 days and the standard deviation of demand during lead time is 2, what is the desired value of R

Answer 1

Answer: 27.28 units

Explanation:

From the question, we are told that a company wants to determine its reorder point (R) and that demand is variable and they want to build a safety stock into R. We have also been given the information that the company wants to have a service level of 95 percent and that average daily demand is 8, lead time is 3 days and the standard deviation of demand during lead time is 2.

It should be noted that a service level of 95% will have a desired z score of 1.64. To get the desired value of R, we multiply the average daily demand by the number of the days in lead time and then add to the multiplication between the standard deviation during the lead time and the desired z score. Mathematically, this will be expressed as:

= (8 × 3) + (2 × 1.64)

= 24 + 3.28

= 27.28

Therefore, the desired value of R = 27.28 units