Scenario 9.7
Cranium, Inc., purchases term papers from an overseas supplier under a continuous review system. The average demand for a popular mode is 300 units a day with a standard deviation of 30 units a day. It costs $60 to process each order and there is a five-day lead-time. The holding cost for a paper is $0.25 per year and the company policy is to maintain a 98% service level. Cranium operates 200 days per year.
-Use the information in Scenario 9.7. What is the reorder point R to satisfy a 98% cycle-service level?
A) less than or equal to 1,500 units
B) greater than 1,500 units but less than or equal to 1,600 units
C) greater than 1,600 units but less than or equal to 1,700 units
D) greater than 1,700 units

Question

Quizplus · Accepted Answer

To calculate the reorder point R, we use the formula:

R = d L + zσL

Where: 
d = average demand per day = 300 units 
L = lead time = 5 days 
σL = standard deviation of demand during lead time = σ√L = 30√5 = 67.08 units (since the demand is normally distributed, we use the empirical rule and multiply the standard deviation by the square root of lead time)

z = z-score corresponding to 98% service level = 2.05 (from the standard normal distribution table)

Putting the values in the formula, we get:

R = 300x5 + 2.05x67.08 = 1500 + 137.43 = 1637.43

Therefore, the reorder point R is greater than 1,600 units but less than or equal to 1,700 units.

Scenario 9.7 Cranium, Inc., Purchases Term Papers from an Overseas Supplier Under