Question

Suppose we are a distributor that uses safety stock and a reorder point for inventory management. If we can find a more consistent manufacturer that will maintain the same mean lead times while cutting the variance of the demand during lead time to 1/2 its original value, the new safety stock that we need to carry to achieve the same service level will also drop to 1/2 its original value.
1. True
2. False

Answer 1

Answer:

The answer is False. By cutting the variance of the demand during lead time to 1/2 its original value while maintaining the same lead times, the new safety stock will also drop to 1/2 its original value.

Explanation:

Safety stock is a form of inventory management that provides an additional unit of an item held as a buffer i order to mitigate risk of running out of stock.

A reorder point provides a buffer of time to restock items when stock is running out. It helps to reduce operational costs and chaos that may arise  such as rush fees owed to suppliers. It makes the use of a warehouse space more efficient.

Suppose we are a distributor that uses safety stock and a reorder point for inventory management. If we can find a more consistent manufacturer that will maintain the same mean lead times while cutting the variance of the demand during lead time to 1/2 its original value, the new safety stock that we need to carry to achieve the same service level will also drop to 1/2 its original value.