Question

You are the store manager at a large furniture store, FurnitureLand. One of your products is a study desk. The demand for study desks is relatively steady and inventory replenishments are ordered from the assembly plant whenever the quantity drops to the reorder level. The lead time from the assembly plant to your store is two weeks, and the ordering cost is $500. Weekly demand for the desk is normally distributed with mean of 50and a standard deviation of 10. Your internal cost of capital is 15 percent per yearand each desk costs $200. (Assume there are 52 weeks in oneyear).(a)Suppose you want to target a 98 percent service level. What should the safety stock and reorder point be

Answer 1

Answer:

safety stock = 33 desks

reorder point = 133 desks

Explanation:

safety stock = (Z-score x √lead time x standard deviation of demand) + (Z-score x standard deviation of lead time x average demand)

• Z-score for 98% confidence level = 2.326
• standard deviation of demand = 10
• √lead time = √2 = 1.414
• we are not given any standard deviation of lead time, so we can assume that it is 0

safety stock = (2.326 x 1.414 x 10) + (2.326 x 0 x 50) = 32.89 ≈ 33 desks

reorder point = lead time demand + safety stock = (50 x 2) + 33 = 133