Scenario 9.13
Demand = 100,000 units/year
Number of days per year = 250 weeks
Standard deviation of weekly demand = 50 units
Average lead time = 5 days
Standard deviation of lead time: 2 days
Cycle-service level = 99%
A continuous review system is used to control inventory.
A normal distribution table is appended to this exam.
-Use the information in Scenario 9.13.If the firm decides to reduce its cycle-service level to 95%,what is the new reorder point if all other parameters remain the same for this product?

Question

Quizplus · Accepted Answer

To determine the new reorder point, we need to follow these steps:
1. Find the current reorder point using the formula: R = d x L + zσL, where R is the reorder point, d is the demand per day (100,000/250 = 400), L is the lead time (5 days), z is the number of standard deviations necessary to achieve the desired service level (2.33 for 99%), and σL is the standard deviation of lead time (2 days). 
R = 400 x 5 + 2.33 x 2 x (50) = 2,705 units
2. Find the new value of z for a 95% service level using the normal distribution table. For a 95% service level, z = 1.65.
3. Plug in the new value of z and solve for the new reorder point:
R = 400 x 5 + 1.65 x 2 x (50) = 2,160 units
Therefore, the new reorder point is greater than 3,500 units but less than or equal to 4,500 units (option B).

Scenario 9.13 Demand = 100,000 Units/year