A company wants to determine its reorder point (R). Demand is variable and the company wants to build a safety stock into R. The company wants to have a service probability coverage of 95 percent. If average daily demand is 8, lead time is 3 days, and the standard deviation of usage during lead time is 2, which of the following is the desired value of R?
A) About 17.9
B) About 19.7
C) About 24.0
D) About 27.3
E) About 31.2

Question

Quizplus · Accepted Answer

R = (Lead time demand) + (Z-score for service probability coverage) x (Standard deviation of demand during lead time)

Lead time demand = Average daily demand x Lead time = 8 x 3 = 24

Z-score for service probability coverage of 95% = 1.645

Standard deviation of demand during lead time = 2

R = 24 + (1.645 x 2) = 27.29, which rounds to 27.3

Therefore, the desired value of R is about 27.3.

A Company Wants to Determine Its Reorder Point (R)