Reorder Point for a Service Level

Probability of meeting demand during lead time = service level

Average demand during lead time

Probability of a stockout

Safety stock z LT Demand

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Reorder Point with Uncertain Demand

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Reorder point with safety stock Service level = probability of NO stockout

L
Standard deviation during leadtime Safety Stock

ROL = (LT D ) + z LT

d = average demand L = lead time t = standard deviation of demand

z = number of standard deviations correspond ing to the service level probabilit y z t

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L = safety stock

Ex 1: Uncertain Demand
PM Computers assembles microcomputers from generic components. It purchases its color monitors from a manufacturer in Taiwan. There is a long lead time of 25 days. Daily demand is normally distributed with a mean of 2.5 monitors and a standard deviation of 1.2 monitors. Determine the safety stock and reorder point corresponding to a 90% service level

Ex 2 Uncertain Demand
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ABC company finds that demand for an item is normally distributed with a mean of 2,000 units a year and standard deviation of 400 units. Unit cost is $100, reorder cost is $200, holding cost is 20% of value a year and lead time is fixed at 3 weeks. Describe an ordering policy that gives a 95% service level. What is the cost of safety stock?

Uncertain Lead Time

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In case that demand is constant but lead time is uncertain

Lead time Lead time is the expected length Lead time is shorter than expected Lead time is longer than expected Outcomes Ideal situation Unused stock when the delivery arrives early Shortages when stocks run out before the delivery arrives
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Uncertain Lead Time

Service Level Level Service = Prob Prob (LT (LT x xD D< < ROL) ROL) = = Prob(LT Prob(LT < < ROL/D) ROL/D) =

Lead time time = = Mean Mean lead lead time time + +Z Z Lead
Ex3: 3:Lead Leadtime timefor fora aproduct productis isnormally normallydistributed distributedwith with Ex mean8 8weeks weeksand andstandard standarddeviation deviation2 2weeks. weeks. mean Ifdemand demandis isconstant constantat at100 100units unitsa aweek, week,what whatordering ordering If policygives givesa a95% 95%cycle cycleservice servicelevel? level? policy
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Uncertain in Both Lead Time and Demand

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Given that
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Mean demand, D Demand standard deviation, D Mean lead time, LT Lead time standard deviation, LT = = = = LTx xD D LT
2 2 LTD = LT D + D 2 LT

Therefore,

Meanlead leadtime timedemand demand Mean Standard deviation deviation Standard

Ex 4: Uncertain lead time and uncertain demand

Demand for a product is normally distributed with mean 400 units a month and standard deviation 30 units a month. Lead time is normally distributed with mean 2 months and standard deviation 0.5 months. What reorder level gives a 95% cycle service level? What is best reorder quantity if recorder cost is $400 and holding cost is $10 a unit a month?