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 combination of changes in lead-time and service level would result in exactly the same level of safety stock as indicated in the table?
A) Lead-time drops to 41 days and service level increases to 99%.
B) Lead-time increases to 18.52 days and service level drops to 92%.
C) Lead-time increases to 20.54 days and service level drops to 90%.
D) Lead-time drops to 3.5 days and service level increases to 99.54%.

Question

Quizplus · Accepted Answer

The safety stock is determined by the formula: Safety Stock = Z * σd * √L, where Z is the Z-score corresponding to the service level, σd is the standard deviation of demand, and L is the lead-time. To maintain the same safety stock, any increase in lead-time must be offset by a decrease in the service level (and vice versa). Option C provides a combination where the increase in lead-time is balanced by a decrease in the service level, maintaining the same safety stock level.

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