The purchasing agent responsible for ordering cotton underwear for Ace Retail Stores has come up with the following information:
Sol:
Maximum daily usage
100 packages
Average daily usage
80 packages
Lead time
9 days
Economic order quantity
3,500 packages
- Compute the safety stock.
- Calculate the reorder point.
Maximum daily usage
100 packages
Average daily usage
80
Excess
20
Lead time
X9 days
Safety stock
180 packages
2. Reorder point = Average usage during lead time + Safety stock
= 80 packages X 9 days + 180 packages = 720 + 180 = 900 packages
Harrington &Sons, Inc., would like to determine the safety stock to maintain for a product so that the lowest combination of stockout cost and carrying cost will result. Each stockout will cost $75; the carrying cost for each safety stock unit will be $1;the product will be ordered five times a year. The following probabilities of running out of stock during an order period are associated with various safety stock levels:
Safety Stock Level
Probability of Stock out
10 units
40%
20
20
40
10
80
5
Using the expected value approach, determine the safety stock level.