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Service Levels, Safety Stock, Reorder Point and Service Levels

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MassPC Inc. Produces PC Pal model. It takes 1 week to produce a batch. Factory orders are normally distributed with average 400 units per week, and standard deviation of forecast errors is estimated at 125 units. If MassPC wants to provide service level of 80%, how much safety stock should be kept? What is the reorder point? What if the service level is 90%, 95%, or 99%?

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Solution Summary

This solution helps with problems regarding service level, safety stock, reorder point and service levels. Step by step calculations are given.

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Reference at http://en.wikipedia.org/wiki/Safety_stock:
1. Z: NORMSINV(Service level) , for example Z=1.645 for a 95% service level
2. Safety stock: {Z*SQRT(Avg. Lead Time * Standard Deviation of Demand^2 + Avg. Demand^2 * Standard Deviation of Lead Time^2)}
3. Re-order Point (ROP): Average Lead Time*Average Demand + Z*SQRT(Avg. Lead Time * Standard Deviation of Demand^2 + Avg. Demand^2 * Standard Deviation of Lead Time^2)
Notes:
Italicized section of the ROP formula is safety stock
The first ...

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