19. Given this information: Expected demand during lead time 300 units Standard

Question

19. Given this information: Expected demand during lead time 300 units Standard deviation of lead time demand 30 units Determine each of the following, assuming that lead time demand is distributed nor a. The ROP that will provide a risk of stockout of 1 percent during lead time. b. The safety stock needed to attain a 1 percent risk of stockout during lead time. c. Would a stockout risk of 2 percent require more or less safety stock than a 1 percent risk? Explain. Would the ROP be larger, smaller, or unaffected if the acceptable risk were 2 instead of 1 percent? Explain. percent

Explanation / Answer

A.

When there is a 1% stock out risk, then service level is 99%.

Value of Z at 99% service level = 2.33

Reorder point (ROP) = Lead time demand + Z*SD

Reorder point (ROP) = 300 + 2.33*30

Reorder point (ROP) = 369.9 or 370 units

B.

Safety stock = Z&SD = 2.33*30 = 69.9 or 70 units

C.

When there is 2% stock out risk, then service level is 98%.

Value of Z at 98% service level = 2.06

Safety stock = 2.06*30 = 61.8 or 62 units

Here, it can be seen that with decrease in service level or increase in stock out risk from 1% to 2%, the safety stock decreases from 70 units to 62 units.

Hence, safety stock will be smaller with increase in stock out risk from 1% to 2%.

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