To take into consideration demand uncertainty in reorder point (R) calculations, what do we add to the product of the average daily demand and lead time in days when calculating the value of R?
A) The product of average daily demand times a standard deviation of lead time
B) A z value times the lead time in days
C) The standard deviation of vendor lead time times the standard deviation of demand
D) The product of lead time in days times the standard deviation of lead time
E) The product of the standard deviation of demand variability and a z-score relating to a specific service probability

Question

Quizplus · Accepted Answer

To take into consideration demand uncertainty in reorder point calculations, we need to add safety stock to the product of the average daily demand and lead time. Safety stock is determined based on the level of service desired, which is in turn related to the probability of running out of stock between the time an order is placed and the time it arrives. The product of the standard deviation of demand variability and a z-score relating to a specific service probability is commonly used to calculate safety stock. Therefore, choice E is the correct answer.

To Take into Consideration Demand Uncertainty in Reorder Point (R)