CA Atul Chauhan (CA Practice) (198 Points)
11 December 2010A firm follows EOQ policy and thereby it places order of 2000 units per order.Demand during the lead time is not certain and follows a probability distribution given below:
Demand during lead time Probabilty
20 0.25
40 0.15
60 0.15
80 0.25
90 0.10
100 0.10
Determine safety stock and reorder level when the required service level is 90%.
CA Atul Chauhan
(CA Practice)
(198 Points)
Replied 13 December 2010
No one is able to solve this question.
veenu_the_great2005
(14 Points)
Replied 15 December 2010
1) Avg Lead Time Demand = (20*0.25) + (40*0.15) + (60*0.15) + (80*0.25) + (90*0.10) + (100*0.10)
= 59 Units
To achieve Service Level of 90%, one will have to achieve 90% probability
Cumulative Probability for 90% Service = 0.25+0.15+0.15+0.25+0.10 = 0.90
The leadtime demand for probability of 0.10 is 90 units. It means if anyone keep 90 units in stock, it is secured 90%. He can meet any demand during leadtime from 20 to 90.
Therefore Re-order Level = 90 units
Safety Stock = Re-orderlevel - Avg Demand During Lead Time = 90 - 59 = 31 Units
CAclubindia
