R Electronics Corp produces a 4-week supply of its Hard Disk Drive(HDD) model wh
ID: 424831 • Letter: R
Question
R Electronics Corp produces a 4-week supply of its Hard Disk Drive(HDD) model when stock on hand drops to 500 units. It takes 1 week to produce a batch of this HDD model. Factory orders average 400 units per week, and the standard deviation of the demand distribution is estimated at 125 units. Notes: You will need to refer to z-table
a) What level of customer service is R Electronics providing to its distributors in terms of stock availability?
b)R Electronics wants to improve customer service up to 90%
1. What is the new safety stock?
2. How will such an improvement affect the company's Reorder policy (New ROP)?
Explanation / Answer
ROP = 500
L = average lead time = 1 week
d = weekly demand = 400
Qp = production lot size = 4 weeks supply = 4 x 400 = 1600
s = std. dev. of weekly demand = 125
(a)
ROP = average lead time demand + safety stock
Avg. lead time demand = 1 week x 400 per week = 400
So, safety stock = ROP - 400 = 500 - 400 = 100
or, Z * s * SQRT(L) = 100
or, Z = 100 / (125 x SQRT(1)) = 0.80
or, Service level = NORMSDIST (0.80) = 78.8% (can use table as well)
(b)
Service level = 90%
so, Z = NORMSINV(0.90) = 1.282 (can use table as well)
New safety stock = Z * s * SQRT(L) = 1.282 x 125 x SQRT(1) = 160.19 or 160 units ------------(1)
New ROP = average lead time demand + safety stock = 400+160 = 560 ------------(2)
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