A company has average demand of 30 units per day.Lead time from the supplier averages 7 days.Assume that the combined standard deviation of demand during lead time has been calculated and is equal to 20 units.One unit costs $10 and the inventory carrying cost is 25 percent. What is the reorder point for the company if it decides on a 99 percent service level?
A)243 units
B)257 units
C)77 units
D)210 units

Question

A company has average demand of 30 units per day.Lead time from the supplier averages 7 days.Assume that the combined standard deviation of demand during lead time has been calculated and is equal to 20 units.One unit costs $10 and the inventory carrying cost is 25 percent.  What is the reorder point for the company if it decides on a 99 percent service level?
A)243 units 
B)257 units 
C)77 units 
D)210 units

Quizplus · Accepted Answer

First, calculate the safety stock using the formula:
Safety Stock = Z-value x Standard Deviation of demand during lead time
Since we want a 99% service level, the Z-value is 2.33 (lookup from the Z-table)
Safety Stock = 2.33 x 20 = 46.6 units (round up to 47 units)

Next, calculate the reorder point using the formula:
Reorder Point = Average demand during lead time x Lead time + Safety stock
Reorder Point = 30 x 7 + 47 = 257

Therefore, the best choice is B) 257 units as this is the reorder point that would provide a 99% service level.

A Company Has Average Demand of 30 Units Per Day