Dunstreet\'s Department Store would like to develop an inventory ordering policy

Question

Dunstreet's Department Store would like to develop an inventory ordering policy of a 90 percent probability of not stocking out. To illustrate your recommended procedure, use as an example the ordering policy for white percale sheets.

     Demand for white percale sheets is 3,000 per year. The store is open 365 days per year. Every three weeks (21 days) inventory is counted and a new order is placed. It takes 6 days for the sheets to be delivered. Standard deviation of demand for the sheets is two per day. There are currently 110 sheets on hand.

How many sheets should you order? (Use Excel's NORMSINV() function to find the correct critical value for the given ?-level. Do not round intermediate calculations. Round "z" value to 2 decimal places and final answer to the nearest whole number.)

Explanation / Answer

Since , probability of not stocking out is 90 percent,

In service probability = 0.90

Corresponding Z value = NORMSINV ( 0.90 ) = 1.2815

Protection period, P

= Frequency of order placement + Lad time of delivery

= 21 days + 6 days

= 27 days

Standard deviation of daily demand of sheets = 2

Therefore, standard deviation of demand during protection period

= 2 x square root ( 27 )

= 2 x 5.196

= 10.392

Therefore , safety stock

= Z value x standard deviation of demand during protection period

= 1.2815 x 10.392

= 13.317 ( 14 rounded to next whole number )

Average daily demand of sheets = 3000 / 365

Therefore,

Reorder point

= Average daily demand x Protection period + Safety stock

= 3000/365 x 27 + 4

= 221.91 + 14

= 235.91 ( 236 rounded to nearest whole number )

Therefore number of sheets to be ordered

= Reorder point – number of sheets on hand

= 236 – 110

= 126

NUMBER OF SHEETS = 126

NUMBER OF SHEETS = 126

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