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Inventory - Reorder point, safety stock and service level

The annual demand for a product is 15,600 units. The weekly demand is 300 units with a standard deviation of 90 units. The cost to place an order is $31.20, and the time from ordering to receipt is four weeks. The annual inventory carrying cost is $0.10 per unit.

a. Find the reorder point necessary to provide a 98 percent service probability.

b. Suppose the production manager is asked to reduce the safety stock of this item by 50 percent. If she does so, what will the new service probability be?

Solution Preview

a. Find the reorder point necessary to provide a 98 percent service probability.
Lead time = 4 weeks
Expected demand during lead time = 4*300=1200 units
Standard deviation of weekly demand = 90 ...

Solution Summary

Explains the concepts involved in inventory management such as reorder point and safety stock for a desired service level.

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