You are buying your first house and using your Aunt Tillie\'s title agency for t

Question

You are buying your first house and using your Aunt Tillie's title agency for the legal processing. She complaints that her office is frequently running out of paper which drives her nuts because that's perhaps the most used item in her office. You tell her that you've taken this course and can help her figure out how much extra paper to buy to reduce the chance of running out. She says she'd like to never run out, but you tell her that realistically she should consider running out of paper only about 1% of the time, and she says "Fine, whatever -just tell me how much extra to order each month". If her office uses an average of 275 reams of paper per month with a standard deviation of 12.1 reams of paper, how big should her safety stock be to allow only a 1% chance of running out of paper each month? (Keep two decimal places in your answer)

Explanation / Answer

1% chance of running out of paper = 99% service level

Z value for 99% service level = NORMSINV ( 0.99) = 2.3263

Standard deviation of monthly demand = Sd = 12.1 ream of paper

Therefore ,

Safety stock required

= Z value x Standard deviation of monthly demand

= 2.3263 x 12.1

=28.148 (28.15 ream of paper rounded to 2 decimal places )

Safety stock = 28.15 ream of paper

Safety stock = 28.15 ream of paper

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