The purchasing manager for Alpa Enterprises requested the following data from th

ID: 365765 • Letter: T

Question

The purchasing manager for Alpa Enterprises requested the following data from the accounting department:

- Annual demand = 15,500;

-Cost of placing an order = $180;

Annual inventory holding costs = $26,4;

Unit cost = $132

Assume Alpha’s demand for an item during the lead time is normally distributed with a mean of 5,000 and a standard deviation of 50.

What reorder point should be used in order to average no more than one stock out every 20 re-order cycles?

If safety stock is 70, how often will a stock out occur during a re-order cycle?

Stock-in probability = 1-1/20 = 0.95

z value = NORMSINV(0.95) = 1.65

Reorder point = d + zs, where d is the demand during lead time and s is the std deviation of demand during lead time

Reorder point = 5000 + 1.65*50 = 5083

Safety stock = z*s = 70 ,

so, z = 70/s = 70/50 = 1.4

Stock-out probability = 1 - NORMSDIST(1.4) = 1 - 0.9192 0.0807

Therefore, stockout will occur 0.0807 or 8.07% of times during a reorder cycle

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