08 PRACTICE PROBLEM FOR STOCHASTIC INVENTORY MODEL

1.The daily demand for an item is 20 units. The procurement lead time for the item is ten
(10) days. The standard deviation of the lead time demand is 12 units. Determine the fill rate
if an order for 300 units is placed each time the inventory falls to 213 units.
Orders is placed when stock level falls to 213, which means reorder point is 213.

Reorder point = (daily demand * lead time in days) + Safety stock

= 213 = (20*10) + Safety stock
=Safety stock = 213 - 200 = 13 units

Safety stock = Z * Standard deviation of demand during lead time

=13 = Z * 12
=Z = 13/12 = 1.08

Z = 1.08 for service level of 86% as per stock coverage table

2. The daily demand for an item is 20 units. The procurement lead time for the item is ten
(10) days. The standard deviation of the lead time demand is 12 units. Determine the fill
rate if an order for 300 units is placed each time the inventory falls to 213 units.

Orders is placed when stock level falls to 213, which means reorder point is 213.

Reorder point = (daily demand * lead time in days) + Safety stock

= 213 = (20*10) + Safety stock

=Safety stock = 213 - 200 = 13 units

Safety stock = Z * Standard deviation of demand during lead time

=13 = Z * 12

=Z = 13/12 = 1.08

3. Weekly demand for a certain item at a firm follows a normal distribution with a mean of
50 units and a standard deviation of five (5) units. The optimal review period is three (3)
weeks, while the lead time is constant at two (2) weeks. The firm wants to ensure there is no
stockout 95% of the time during the lead time. Compute the safety stock, target inventory,
and the order quantity if at the time of review there are 58 units in store.

Average Weekly Demand = 50 units

Standard deviation of Weekly demand = 5 units
Lead time = 2 weeks
Review time = 3 weeks

Protection period = Review time + Lead time = 2+3 = 5 weeks

Standard deviation of demand during Protection period
= SQRT (Protection period) * Standard deviation in weekly demand
= SQRT (5) *5 = 11.18
Service level required = 95%
Z of 95% = 1.645

Safety stock = Z * Standard deviation of demand during lead time

= 1.645 * 11.18 = 18.391 = 18 units

Target inventory = (Weekly demand * Protection Period) + Safety stock

= (50*5) + 18 = 268 unit

Order Quantity = Target inventory - In stock quantity = 268 -58 = 210 units

4. Weekly demand for a certain item at a firm follows a normal distribution with a mean of
200 units and a standard deviation of 50 units. The optimal review period is four (4) weeks,
while the lead time is constant at three (3) weeks. If the firm wants to ensure a cycle service
level of 98%, compute the safety stock, maximum inventory, and the order quantity if at the
time of review there are 100 units in store.

Average Weekly Demand = 200 units

Standard deviation of Weekly demand = 50 units
Lead time = 3 weeks
Review time = 4 weeks

Protection period = Review time + Lead time = 4+3 = 7 weeks

Standard deviation of demand during Protection period

= SQRT (Protection period) * Standard deviation in weekly demand

= SQRT (7) *50 = 132.287
Service level required = 98%

Z of 98% = 2.054
Safety stock = Z * Standard deviation of demand during lead time

= 2.054 * 132.287 = 271.71 = 272 units

Target Or Maximum inventory = (Weekly demand * Protection Period) + Safety stock

= (200*7) + 272 = 1672 unit

Order Quantity = Target inventory - In stock quantity = 1672 -100 = 1572 units