Batara, Briel Arnt C.

BS BA-OM 2

The B.N. Thayer and D.N. Thaht Computer Company sells a desktop computer that
is popular among gaming enthusiasts. In the past few months, demand has been
relatively consistent, although it does fluctuate from day to day. The company orders
the computer cases from a supplier. It places an order for 5,000 cases at the
appropriate time to avoid stockouts. The demand during the lead time is normally
distributed, with a mean of 1,000 units and a standard deviation of 200 units. The
holding cost per unit per year is estimated to be $4.

How much (in units) safety stock should the company carry to maintain a 96%
service level? What is the reorder point? What would the annual holding cost be if
this policy is followed?

1. Using the normal distribution table, the Z value for the 90% service level is
about 1.75. The standard deviation is 200

The safety stock is computed as follows:

Zθ = 1.75 x 200 = 300 units

The company should carry a safety stock of 350 units to maintain a 96%
service level.

2. The reorder point is computed as follows:

ROP = Average demand during lead time + Safety stock

= 1000 + 350

= 1350 units

For a normal distribution with a mean of 1000, the reorder pain is 1350 units.

3. The total annual holding cost is computed as follows:

Average inventory cost per unit per year + safety stock x holding cost per unit
per year
500
2
4 + [350]4 = $11.400

The annual holding cost if the policy stated is followed would be $11,400.