Annual demand for an item is 6,500 units with the cost per unit at $380. The holding rate is 18% and the order cost is $15.00 per order. The standard deviation of daily demand is 7 units. Assume 261 days in the year and a lead-time of 4 days. If a service level of 96% is desired during the reorder interval, what is the reorder point

124 units

Explanation:

The reorder point (ROP) is the level of inventory which triggers an action to replenish that particular inventory stock. It is a minimum amount of an item that a firm holds in stock, such that, when a stock falls to this amount, the item must be reordered.

DATA

Annual Demand = 6500

Ordering Cost = $15.00

Holding Cost (18% of Price $380)= $68.40

EOQ = √ 2AO / H  

where

A = Annual Demand  

O = Ordering Cost per order  

H = Holding Cost per unit per annum  

EOQ = √ 2AO / C

EOQ = √ (2 * 6500 * 15) / 68.40

EOQ= 53.393 units or, 54 units  

Standard Deviation of Daily Demand = 7

No of days = 261

Lead Time = 4 days

Average Demand ( Annual Demand/ No of days) = 24.90421

Service Level Desired = 96%

Z Value at 96% = 1.751

Standard Deviation of Demand in Lead Time = SDd * √Lead Time14

Safety Stock for 93% service level  

Z value * Standard Deviation of Demand in Lead Time25

Lead Time Demand ( Lead Time x Avg Demand) = 99.61686

Reorder Point = Lead Time Demand + Safety Stock= 124