Question

Demand each period is normally distributed and an order-up-to model is used to decide order quantities. Which of the following influences the chosen order-up-to level (i.e., a change in which of the following would change the chosen order-up-to level)?
I. The mean of demand in one period
II . The standard deviation of demand over L+1 periods
III. The target in-stock probability
a) Only I
b) Only II
c) Only II
d) I and II
e) I and III
f) II and III
g) I, II and III

Answer 1

Answer:

Correct answer is G.

I, II and III

Explanation:

Order-up-to-level (T) = d(P+L) + safety stock

d = mean demand

When Lead time is fixed,

Safety stock = function of (std deviation of demand, L, P, in-stock probability)

When Lead time also has variability,

Safety stock = function of (std deviation of demand, std. deviation of lead time, d, L, P, in-stock probability)

So, in any case, T will depend on d, std deviation of demand, and in-stock probability.