Scenario 9.7
You are the operations manager of a firm that uses the continuous-review inventory control system.Suppose the firm operates 52 weeks a year,365 days,and has the following characteristics for its primary item:
Demand = 25,000 units/year
Ordering cost = $30/order
Holding cost = $8/unit/year
Lead time = 2 weeks
Standard deviation in weekly demand = 100 units
A normal distribution table is appended to this exam.
-Use the information in Scenario 9.7.What is the annual cost of holding safety stock for this item if they use a 90% service level?
A)less than or equal to $1,500
B)greater than $1,500 but less than or equal to $1,550
C)greater than $1,550 but less than or equal to $1,600
D)greater than $1,600

Question

Quizplus · Accepted Answer

The annual cost of holding safety stock is equal to the holding cost per unit multiplied by the average safety stock. The average safety stock is equal to the standard deviation in weekly demand multiplied by the safety factor. The safety factor is equal to the inverse of the normal distribution function evaluated at the desired service level.In this case, the standard deviation in weekly demand is 100 units, the holding cost per unit is $8, and the desired service level is 90%. The safety factor is equal to the inverse of the normal distribution function evaluated at 0.9, which is 1.28. The average safety stock is equal to 100 units * 1.28 = 128 units. The annual cost of holding safety stock is equal to $8 * 128 = $1,024.

Scenario 9.7 You Are the Operations Manager of a Firm That Uses