A large retail company is in the inventory planning process for the upcoming yea

Question

A large retail company is in the inventory planning process for the upcoming year using a continuous review model. Specifically, they are deciding how to plan orders for a particular product that is frequently used. The company has determined that demand every year is stable and known to be 100,000. We know that with the company’s current supplier, placing/processing an order results in a cost of $250/order and it will take 10 days for the shipment to be received. It is known that to maintain one unit in their warehouse for a year, it costs $2 (ie, holding cost is $2). The supplier charges 3$ per unit.

If the standard deviation of demand during the lead time is 250 units and the retailer wants a service level of 99%, what is their reorder point? Assume a 365 day year.

Explanation / Answer

Z value for service level of 99% = NORMSINV ( 0.99) = 2.326

Standard deviation of demand during lead time = 250 units

Therefore, Safety stock = Z value x Standard deviation of demand during lead time = 2.32634 x 250 = 581.585

Average daily demand = Annual demand / 365 days = 100,000/ 365

Therefore,

Reorder point

= Average daily demand x Lead time + Safety stock

= 100,000/365 x 10 + 581.585

= 2739.726 + 581.585

= 3321.31

Above derived value is nearest to the option“ 3322.33” . Therefore Reorder point = 3322.33

Reorder point = 3322.33

Reorder point = 3322.33

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