A Warehouse is evaluating the safety stock policy for all its items, as identifi
ID: 366520 • Letter: A
Question
A Warehouse is evaluating the safety stock policy for all its items, as identified by the SKU code. For a special SKU the company always orders 80 units each time an order is placed. The daily demand is constant, at 5 units per day; the lead time is normally distributed, with a mean of three days and a standard deviation of two days. Holding cost is $3 per unit per year. A 95% service level is to be maintained.
What is the standard deviation of demand during the lead time?
How much safety stock should be carried, and what should be the reorder point?
What is the total annual holding cost?
Explanation / Answer
Order quantity (Q) = 80 units
Average daily demand (d) = 5 units
Mean lead time (L) = 3 days
Standard deviation of lead time = 2 days
Holding cost (H) = $3
At 95% service level value of Z = 1.65
a) Standard deviation of demand during lead time = d x standard deviation of lead time = 5x2 = 10 units
b) Safety stock = Z x standard deviation of demand during lead time
= 1.65 x 10
= 16.5 units
Reorder point = d x L + Safety stock
= 5 x 3 + 16.5
= 15 + 16.5
= 31.5
C) Total annual Holding cost = (Q /2)H = (80/2)3 = $120
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