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1 ProbROPBasic
1 ProbROPBasic
1 ProbROPBasic
Set 1: General
Notations
Lead Time Demand : LTD
Average Lead Time Demand : LTD
Std. Dev. Lead Time Demand : LTD
Safety Stock : Isafety
Reorder Point : ROP
Demand per period : R
Average Demand : R
Std. Dev. of Demand : R
Lead Time : L
Average Lead Time : L
Std. Dev. of Lead Time : L
Flow Variability; Safety Inventory Ardavan Asef-Vaziri Sep-2012 2
ROP Problems
a) If average demand per day is 20 units and lead time is 10 days.
Assuming zero safety stock. Isafety=0, compute ROP.
b) If average demand per day is 20 units and lead time is 10 days.
Assuming 70 units of safety stock. Isafety=70, compute ROP?
c) If average demand during the lead time is 200 and standard
deviation of demand during lead time is 25. Compute ROP at
90% service level. Compute safety stock.
d) If average demand per day is 20 units and standard deviation
of daily demand is 5, and lead time is 16 days. Compute ROP at
90% service level. Compute safety stock.
e) If demand per day is 20 units and lead time is 16 days and
standard deviation of lead time is 4 days. Compute ROP at 90%
service level. Compute safety stock.
Average
ROP Quantity
demand
Safety stock
=NORM.S.INV(0.9) 2
2.1
2.2
0.9772
0.9821
0.9861
0.9778
0.9826
0.9864
0.9783
0.9830
0.9868
0.9788
0.9834
0.9871
0.9793
0.9838
0.9875
0.9798
0.9842
0.9878
0.9803
0.9846
0.9881
0.9808
0.9850
0.9884
0.9812
0.9854
0.9887
0.9817
0.9857
0.9890
= 1.28155 2.3
2.4
0.9893
0.9918
0.9896
0.9920
0.9898
0.9922
0.9901
0.9925
0.9904
0.9927
0.9906
0.9929
0.9909
0.9931
0.9911
0.9932
0.9913
0.9934
0.9916
0.9936
2.5 0.9938 0.9940 0.9941 0.9943 0.9945 0.9946 0.9948 0.9949 0.9951 0.9952
2.6 0.9953 0.9955 0.9956 0.9957 0.9959 0.9960 0.9961 0.9962 0.9963 0.9964
L: Lead Time
R: Demand per period (per day, week, month)
R: Average Demand per period (day, week, month)
R: Standard deviation of demand (per period)
LTD: Average Demand During Lead Time
LTD = L × R
LTD: Standard deviation of demand during lead time
𝜎𝐿𝑇𝐷 = 𝐿𝜎𝑅
Flow Variability; Safety Inventory Ardavan Asef-Vaziri Sep-2012 13
μ and σ of demand per period and fixed L
If demand is variable and Lead time is fixed
L: Lead Time
L: Average Lead Time
L: Standard deviation of Lead time
R: Demand per period
LTD: Average Demand during lead time
LTD = L × R
LTD: Standard deviation of demand during lead time
𝜎𝐿𝑇𝐷 =R𝜎𝐿
Flow Variability; Safety Inventory Ardavan Asef-Vaziri Sep-2012 18
μ and σ of L and Fixed R
L: Lead Time
L: Average Lead Time = 16 days
L: Standard deviation of Lead time = 4 days
R: Demand per period = 20 per day
LTD: Average Demand During Lead Time
LTD = 16 × 20 = 320
LTD: Standard deviation of demand during lead time
𝜎𝐿𝑇𝐷 =R𝜎𝐿 𝜎𝐿𝑇𝐷 =20(4) =80
Flow Variability; Safety Inventory Ardavan Asef-Vaziri Sep-2012 19
μ and σ of L and Fixed R
1 2 3 4 5 1 2 3 4 5
Service Level
Increasing service level increases the required safety inventory
more than proportionately.
Flow Variability; Safety Inventory Ardavan Asef-Vaziri Sep-2012 25
Problem 7.1
Selecting service level and safety inventory level is an important
strategic decision.
A firm may choose high quality service in terms of product
availability. Or
The firm may choose to be a low cost supplier by holding down
inventory costs. In either case, it is positioning itself along the
quality vs. cost trade-off curve.
L: lead time
L: Average lead time
σL: Standard deviation of the lead time