Question

Annual demand for an item is 11,000 units with the cost per unit at $250. The holding rate is 10% and the order cost is $14.00 per order. The standard deviation of daily demand is 3 units. Assume 260 days in the year and a lead-time of 2 days. If a service level of 97% is desired during the reorder interval, what is the reorder point? (Note: Due to rounding and your exact choice of z, your answer may be a few units off the choices given.)

Answer 1

Answer:

93 units

Explanation:

Annual demand for an item = 11,000 units

cost per unit = $250

holding rate = 10%

Order cost = $14.00 per order

No. of days in a year = 260

Lead-time = 2 days

$Average\ daily\ demand=\frac{Annual\ demand\ for\ an\ item}{No.\ of\ days\ in\ a\ year}$

$Average\ daily\ demand=\frac{11,000}{260}$

                                              = 42.3 units

For a service level of 97%, the value of z is 1.881

Therefore,

Reorder point:

= Average daily demand × Lead time + Standard deviation of the daily demand × no. of standard deviation corresponding to service level probability × $\sqrt{Lead\ time}$

= (42.3 × 2) + (3 × 1.88 × $\sqrt{2}$)

= 92.57

= 93 units