Question

A certain company reorders envelopes when it stock drops to 15 boxes, although demand for envelopes during lead time is normally distributed with a mean of 10 boxes and a standard deviation of 3 boxes. Which of the following is closest to the probability of this company stocking out before a new order of envelopes arrives?

Answer 1

Answer:

25%

Explanation:

The reorder point is the inventory management system in which a certain level of inventory is set as a trigger for reordering the stock. The probability to stocking out before the new order of envelopes arises is 25%. The lead time is normally distributed with mean of 10 boxes.

(reorder point - normally distributed mean) / standard deviation

15 boxes - 10 boxes / 3 boxes = 1.67

To calculate probability of stocking out for the company,

1.67 * 15 boxes reorder point = 25%

Answer 2

Question: The options were not given in the question. here are the options;

a. 50%

b. 75%

c. 5%

d. 95%

e. 25%

Answer:

The correct option is D. 95%

Explanation:

ROP = demand during lead time + (Z * standard deviation of lead time demand)

15 = 10 + (Z * 3)

Z = 1.667

For Z = 1.667, service level is nearly 95%