Safety Stock and Reorder Point

Consider the following data.

Inventory

Item

Average

Demand

(Annual)

Sigma (Std. Dev.)

of Demand During

Lead Time

Item Unit

Cost

F

-

11001

15,000

100

$250.00

K

-

12002

100,000

300

$2.00

L

-

13003

250,000

200

$0.20

N

-

14004

300,000

400

$1.00

P

-

21001

50,000

60

$125.00

S

-

22002

80,000

75

$30.00

Note

: All items are independent demand items.

Based on the above data:

·

Calculate the safety stock quantities and the inventory cost associated with safety stock

(based on the item unit cost) for the inventory items at four different service levels (50%,

80%, 90%, and 95%).

·

Develop a table to

present the inventory quantities and the safety stock costs at each

service level.

·

Assuming that demand occurs at a steady pace every month (in other words, there is no

seasonality or cyclical change in the level of demand), calculate the reorder point fo

r each

item assuming a lead time of two months and a service level of 90%.

·

Develop a table to present the reorder points for all products under these conditions (two

month lead time and service level of 90%).

To find the area under the normal curve, you can

apply either Table I.1 or Table I.2. In Table I.1,

you must know how many standard deviations that point is to the right of the mean. Then, the

area under the normal curve can be read directly from the normal table. For example, the total

area under the no

rmal curve for a point that is 1.55 standard deviations to the right of the mean is

.93943.

TABLE I.1

.

Safety Stock and Reorder Point

Consider the following data.

Inventory

Item

Average

Demand

(Annual)

Sigma (Std. Dev.)

of Demand During

Lead Time

Item Unit

Cost

F-11001 15,000 100 $250.00

K-12002 100,000 300 $2.00

L-13003 250,000 200 $0.20

N-14004 300,000 400 $1.00

P-21001 50,000 60 $125.00

S-22002 80,000 75 $30.00

Note: All items are independent demand items.

Based on the above data:

 Calculate the safety stock quantities and the inventory cost associated with safety stock

(based on the item unit cost) for the inventory items at four different service levels (50%,

80%, 90%, and 95%).

 Develop a table to present the inventory quantities and the safety stock costs at each

service level.

 Assuming that demand occurs at a steady pace every month (in other words, there is no

seasonality or cyclical change in the level of demand), calculate the reorder point for each

item assuming a lead time of two months and a service level of 90%.

 Develop a table to present the reorder points for all products under these conditions (two

month lead time and service level of 90%).

To find the area under the normal curve, you can apply either Table I.1 or Table I.2. In Table I.1,

you must know how many standard deviations that point is to the right of the mean. Then, the

area under the normal curve can be read directly from the normal table. For example, the total

area under the normal curve for a point that is 1.55 standard deviations to the right of the mean is

.93943.

TABLE I.1

.