Chapter 9: Inventory Management

Continuous Review System

• Selecting the reorder point when demand is variable and lead time is constant
• Reorder point = Average demand during lead time + Safety stock

• where

• L = constant lead time in weeks (or days or months)

How to Compute Reorder Point (1 of 5)

• Choosing a Reorder Point

• Choose an appropriate service-level policy
• Determine the distribution of demand during lead time
• Find the z-score corresponding to the required service level
• Determine the safety stock and reorder point levels

How to Compute Reorder Point (2 of 5)

• Step 1: Service Level Policy
• Service Level (Cycle Service Level) – The desired probability of not running out of stock in any one ordering cycle, which begins at the time an order is placed and ends when it arrives in stock.

How to Compute Reorder Point (3 of 5)

• Step 2: Distribution of Demand during Lead Time
• Specify mean and standard deviation
• Standard deviation of demand during lead time

• How to compute the standard deviation of 3 week’s demand

How to Compute Reorder Point (4 of 5)

• Step 3: Distribution of Demand during Lead Time
• Read the normal probability distribution to find the z-score for an 85 Percent Service Level

How to Get Z Score

• 7–

• Z score for 85% = 1.04

• How about Z-score for 90% service level?

How to Compute Reorder Point (5 of 5)

• Step 4: Determining Safety Stock and Reorder Point
• Safety stock = z σd L T
• where
• z = number of standard deviations needed to achieve the cycle-service level
• σ d L T = stand deviation of demand during lead time