A company wants to determine its reorder point (R).Demand is variable and they want 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

First, we need to calculate the safety stock (SS) to build into the reorder point, which is equal to:
SS = z * σLT
where z is the z-value associated with the desired service probability coverage, which is 1.645 for 95% coverage, and σLT is the standard deviation of usage during lead time, given as 2. Therefore:
SS = 1.645 * 2 = 3.29 (rounded up to 4 for practical purposes)

Next, we can calculate the reorder point (R) as:
R = d * LT + SS
where d is the average daily demand, given as 8, and LT is the lead time, given as 3 days. Therefore:
R = 8 * 3 + 4 = 28

The closest choice to 28 is D) About 27.3, which is the desired value of R.

A Company Wants to Determine Its Reorder Point (R)