Question

Demand for walnut fudge ice cream at the Sweet Cream Dairy averages 5.9 gallons per day. The dairy uses a continuous review (reorder point) policy with a two-day lead time. The variance of daily demand during is 2.9.
Assuming a normal distribution and a desired service level of 93%, what is the optimal reorder point and safety stock?

Answer 1

The optimal reorder point of Sweet Cream Dairy is 27.71 or 28 (rounded off)  and Safety stock is 15. 91  or 16 gallons (rounded off)

Explanation:

the reorder point is to multiply the average daily usage rate for an inventory item by the lead time in days to replenish it.

The safety stock formula with standard deviation is more complicated but also more accurate.

Safety stock = desired service level × standard deviation of lead time × demand average

Safety stock = ( 93÷100) ×  2.9 × 5.9 =  15. 91  or 16 gallons (rounded off)  

$Safety stock = ( 93÷100) × 2.9 × 5.9 = 15. 91 or 16 gallons (rounded off)$

Reorder Point = (Average Daily Usage x Average Lead Time in Days) + Safety Stock  

= (5.9 x 2) + 15. 91 = 11.8 + 15.91 = 27.71 or 28 (rounded off)

$= (5.9 x 2) + 15. 91 = 11.8 + 15.91 = 27.71 or 28 (rounded off)$