Annual demand for a product is 12,480 units; weekly demand is 240 units with a s
ID: 469011 • Letter: A
Question
Annual demand for a product is 12,480 units; weekly demand is 240 units with a standard deviation of 50 units. The cost of placing an order is $130, and the time from ordering to receipt is four weeks. The annual inventory carrying cost is $0.60 per unit.
To provide a 99 percent service probability, what must the reorder point be? (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.)
Suppose the production manager is told to reduce the safety stock of this item by 100 units. If this is done, what will the new service probability be? (Use Excel's NORMSDIST() function to find the correct probability for your computed Z-value. Round your answer to the nearest whole number.)
Annual demand for a product is 12,480 units; weekly demand is 240 units with a standard deviation of 50 units. The cost of placing an order is $130, and the time from ordering to receipt is four weeks. The annual inventory carrying cost is $0.60 per unit.
Explanation / Answer
a)
Annual demand = 12,480
Weekly Demand = 240
Standard Deviation = 50
Ordering Cost = $ 130
Carrying Cost = $0.40
Lead Time = 4 weeks
Z = 99% = 2.33
Standard Deviation in Lead Time = Standard Deviation * sqrt(Lead Time) = 50 * Sqrt(4) = 100 units
Safety Stock = Z * Standard Deviation in Lead Time = 2.33 * 100 = 233 units
Reorder point = (Weekly demand * Lead Time) + safety stock
Reorder point = (240 * 4) + 233 = 960 + 233 = 1193 units
b)
reducing safety stock by 100
new safety stock = 233 - 100 = 133
Safety Stock = z * Standard Deviation in Lead Time
133 = z * 100
Z = 1.33
Using Normsdist() we get,
Service probability = 0.91 = 91%
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