# Reorder Stock Template by brq20133

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• pg 1
Module C5

Reorder Point/Service Levels
DETERMINING A REORDER
POINT, r* (Without Safety Stock)
• Suppose lead time is 8 working days
• The company operates 260 days per year
• r* = LD where L and D are in the same time units

• L = 8/260  .0308 yrs D = 6240 /year
r* = .0308(6240)  192
OR,
L = 8 days; D/day = 6240/260 = 24
r* = 8(24) = 192
DETERMINING A REORDER
POINT, r* (With Safety Stock)
•   Suppose lead time is 8 working days
•   The company operates 260 days per year
•   r* = LD + SS
•   Suppose a safety stock of SS = 13 is desired

• L = 8/260  .0308 yrs D = 6240 /year
r* = .0308(6240) +13  192 +13 = 205
Actual Demand Distribution
• Suppose on a short term basis demand
actually more closely follows a normal
distribution with:
– Weekly mean demand W
– Weekly variance 2W, Weekly St’d dev. W,
• Demand over an n-week period:
– normal
– Mean nW                       _
– Variance = n2W, St’d Dev. = (n) W
Calculating Q*
• Over the course of a year, the standard
deviation becomes small relative to the
mean value -- hence a common practice is
to ignore any variability and calculate Q*
by the usual EOQ formula
• Lead times, however, tend to be short and
hence variability must be considered.
• A cycle service level is supplied to the
modeler -- the probability of not running
out of stock during the lead time period.
• Suppose lead time is L weeks
– Demand during lead time is normal
– Mean demand = L = LW
– St’d dev. = L = L W
Example -- Allen Appliance
• Suppose we can assume that demand follows a
normal distribution
– This can be checked by a “goodness of fit” test
• From our data, over the course of a week, W, we can
approximate W by (105 + … + 130)/10 = 120
• W2  sW2 = ((1052 +…+1302) - 10(120)2)/9  83.33
DEMAND DISTRIBUTION
• Normal

• 8 days = 8/5 = 1.6 weeks, so

• L = (1.6)(120) = 192
• L2  (1.6)(83.33) = 133.33
_____
• L 133.33 = 11.55
SAFETY STOCK
• Suppose we wish a cycle service level of 99%
– WE wish NOT to run out of stock in 99% of our
inventory cycles

L = 11.55

.01

192         ?                X
0    Z.01 = 2.33           Z
Calculating r* and Safety Stock Costs
• Reorder point, r* = L + z.01 L =
192 + 2.33(11.55)  219

• Safety stock SS = 2.33(11.55) = 27
• Safety stock cost = ChSS = 1.40(27) = \$37.80

This should be added to the TOTAL ANNUAL COST
Using the Template

Reorder Point

Enter
Information         Select
Cycle Service Level
Worksheet
Module C5 Review
• In the short run, demand may seem to follow a
probability distribution (normal)
• In the long term, variability is relatively
insignificant in magnitude compared to the mean
value-- so calculate Q* in usual way.
• Determine a cycle service level = 1- 
• Determine the mean and st’d deviation for demand