Scenario 9.7
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.
-Use the information in Scenario 9.7. What service level does a reorder point of 1,524 imply?
A) less than or equal to 50%
B) greater than 50% but less than or equal to 55%
C) greater than 55% but less than or equal to 60%
D) greater than 60%

Question

Quizplus · Accepted Answer

To determine the service level implied by a reorder point of 1,524, we first calculate the average demand during the lead time and the standard deviation of demand during the lead time. The average demand during the lead time (5 days) is 300 units/day * 5 days = 1,500 units. The standard deviation of demand during the lead time is the daily standard deviation (30 units) multiplied by the square root of the lead time in days, which is sqrt(5), giving us 30 * sqrt(5) ≈ 67.08 units. The reorder point formula is average demand during lead time + (Z-score * standard deviation of demand during lead time). Given the reorder point of 1,524, we can infer that the Z-score corresponds to a service level higher than the minimum required to cover the average demand, indicating a service level greater than 50%. Since the reorder point is only slightly above the average demand, it suggests a high service level but does not precisely indicate the exact percentage without calculating the Z-score. However, given that the reorder point exceeds average demand and accounts for variability, it implies a service level greater than 60%, as it aims to cover more than just the average fluctuations in demand.

Scenario 9.7 Cranium, Inc., Purchases Term Papers from an Overseas Supplier Under