Scenario 9.5
Cranium,Inc. ,purchases term papers from an overseas supplier under a continuous review system.The average demand for a popular mode is 300 units a day with a standard deviation of 30 units a day.It costs $60 to process each order and there is a five-day lead-time.The holding cost for a paper is $0.25 per year and the company policy is to maintain a 98% service level.Cranium operates 200 days per year.A normal distribution table is appended to this exam.
-Use the information in Scenario 9.5.If lead-time increases by three days,what is the reorder point needed to maintain a 98% service level?

Question

Quizplus · Accepted Answer

First, we need to calculate the reorder point using the current lead time of 5 days:
Reorder point = (average demand during lead time * safety stock) + average demand during lead time
First, we need to calculate the safety stock:
Service level = 98%, which means the z-value is 2.05 (found in the normal distribution table)
Standard deviation of demand during lead time = standard deviation per day * square root of lead time
Standard deviation of demand during lead time = 30 * sqrt(5) = 67.08
Safety stock = z-value * standard deviation of demand during lead time
Safety stock = 2.05 * 67.08 = 137.42
Reorder point = (300 * 5) + 137.42 = 1,637.42
Now, with a lead time of 8 days:
Standard deviation of demand during lead time = 30 * sqrt(8) = 84.85
Safety stock = 2.05 * 84.85 = 173.85
Reorder point = (300 * 8) + 173.85 = 2,573.85
Therefore, the answer is C) greater than 2,500 units but less than 2,600 units.

Scenario 9.5 Cranium,Inc. ,Purchases Term Papers from an Overseas Supplier Under a Under