A 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%.
No one is able to solve this question.
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
Thanks a lot
Gupta Sachdeva & Co. Chartered Accountants
New Delhi
CA Final
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