Selecting the Reorder Point with

Constant Demand and Lead Time

Inventory
Position

On-hand
Inventory
R

Order
Placed

Time

Reorder Point

The reorder point is the inventory level at

which a new order is placed.

Order must be made while there is enough

stock in place to cover demand during lead
time.

Formulation:

R = dL

where d = demand rate per time period

L = lead time

Terms used...
OH = ON HAND
SR = SOURCE REGISTER
IP = INVENTORY POSITION
BO = BACK ORDER

Practice Problem with Constant

Demand and Lead Time
Demand

for water bottles from a

particular concession stand is always 30
per day and the lead time is always 2
days. The on hand inventory is currently
15 bottles, and there is an incoming order
of 50 water bottles. If there are currently
no backorders, what is the inventory
position? Should a new order be placed?

Solution
R = Total demand during lead time = 30*2 =
60 bottles
IP = OH + SR BO
= 15 + 50 0 = 65 bottles
65 > 60 so a new order is NOT needed

Safety stock
It

is the amount by which the reorder point

exceeds the expected (average) lead
time demand.
SS = zd ( L)

Cont..

Safety stock simply is inventory that is carried

to prevent stockouts
It is the stock held by a company in excess of
its requirement for the lead time. Companies
hold safety stock to guard against stock-out.
Safety stock is calculated using the following
formula:
Safety Stock = (Maximum Daily Usage
Average Daily Usage) Lead Time

how safety stock can reduce the

risk of a stockout during lead time
(LT)

Safety Stock and Service Level

Safety stock determines the chance of a stockout

during lead time
The complement of this chance is called the
service level
Service level is defined as the probability of not
incurring a stockout during any one lead time
The higher the probability inventory will be on
hand, the more likely customer demand will be
met.
Service level of 90% means there is a .90
probability that demand will be met during lead
time and .10 probability of a stockout.

Safety Stock and Reorder Point

Without

With

safety stock:

safety stock:

= dL + SS

Safety Stock Example

Daily demand = 20 units
Lead time = 10 days
S.D. of lead time demand = 50
units
Service level = 90%
Determine:

1.
2.

Safety stock
Reorder point

Safety Stock Solution

Step 1 determine z
From appendix B: z =1.28
Step 2 determine safety stock

Step 3 determine reorder point

Reorder Point with Variable

Demand

Reorder Point with Variable Demand

Reorder Point with Variable Demand

Example
If average daily demand is 30 yd per day,lead time is 10 and
standard deviation for daily demand is 5 yd per dayFor service
level of 95%.

Reorder Point with Variable Lead

Time
For

constant demand and variable lead

time:

Reorder Point with Variable Lead

Time Example

Carpet Discount Store:

Reorder Point
Variable Demand and Lead Time
When

both demand and lead time are

variable:

Reorder Point
Variable Demand and Lead Time
Example
Carpet

Discount Store:

d 30 yd per day
d 5 yd per day

L 10 days
L 3 days
Z 1.65 for 95% service level
R d L Z

( d )

L ( L )

(30)(10) (1.65) (5)(5)(10) (3)(3)(30)(30)

300 150.8
450.8 yds

Practice Problem with Variable

Demand and Constant Lead Time
The

average weekly demand for water

bottles from a particular concession stand
is 80 bottles per week, and the constant
lead time is 3 weeks. There is a standard
deviation of 10 bottles. If a 95% service
level is desired, what would the safety
stock and reorder point be?

Solution
d = 80 bottles
d = 10 bottles
L = 3 weeks
dLT = d (L) = 10(3) = 17.32
z = 1.64
Safety stock = zdLT = (1.64)(17.32)
= 28.40 or 28 bottles
Reorder Point = dL + safety stock
= (80)(3) + 28 = 268 bottles

Selecting Reorder Point with

Variable Demand and Lead Time
Two assumptions:
Demand and lead time are measured
in the same time units (i.e. days, weeks,
etc.)
Demand and lead time are
independent of one another

Formulas for Variable Demand

and Variable Lead Time
Safety stock = zdLT
R = dL + SS

Practice Problem with Variable

Demand and Lead Time
The

average weekly demand for water

bottles from a particular concession stand
is 50 bottles per week, with a standard
deviation of 10 bottles. The average lead
time is 2 weeks, with a standard deviation
of 1 week. If an 80% service level is
desired, what would the reorder point be?

Solution
d = 50 bottles
d = 10 bottles
L = 2 weeks
LT = 1 week
dLT = (L2d + d22LT)
= [(2)(10)2 + (50)2(1)2]
= 51.96 bottles
z = 0.84
Safety stock = zdLT = (0.84)(51.96)
= 43.64 or 44 bottles
Reorder point = dL + SS
= (50)(2) + 44
=144 bottles

How Much to Order in a P System

EXAMPLE
A distribution center has a backorder (BO)
for five 36-inch color TV sets. No inventory is
currently on hand (OH), and now is the time
to review. How many should be reordered if
T = 400 and no receipts are scheduled (SR)?

Solution
IP = OH + SR BO
= 0 + 0 5 = 5 sets
T IP =400 (5) = 405 sets

That is, 405 sets must be ordered to bring the

inventory position up to T sets.

Finding Safety Stock and R

Records

show that the demand for

dishwasher detergent during the lead
time is normally distributed, with an
average of 250 boxes and L = 22. What
safety stock should be carried for a 99
percent cycle-service level? What is R?

Solution
Safety stock (SS)
= zL
= 2.33(22) = 51.3
= 51 boxes
2.33 is the number of standard
Reorder point = DL + SS
deviations, z, to the right of
= 250 + 51 average demand during the
= 301 boxeslead time that places 99% of the
area under the curve to the left
of that point.

Reorder Point for Variable Demand

Let

us return to the bird feeder in Example

12.2. The EOQ is 75 units. Suppose that the
average demand is 18 units per week with
a standard deviation of 5 units. The lead
time is constant at two weeks. Determine
the safety stock and reorder point if
management wants a 90 percent cycleservice level.

Solution

In this case, d = 5, d = 18 units, and L = 2 weeks,

so
dLT = d L = 5 2 = 7.07.
Consult the body of the table in the Normal
Distribution appendix for 0.9000, which
corresponds to a 90 percent cycle-service level.
The closest number is 0.8997, which corresponds to
1.2 in the row heading and 0.08 in the column
heading. Adding these values gives a z value of
1.28. With this information, we calculate the safety
stock and reorder point as follows:
Safety stock = zdLT
= 1.28(7.07) =9.05 or 9 units
Reorder point
= dL + Safety stock
=2(18) + 9 = 45 units

Suppose that the demand during

lead time is normally distributed with
an average of 85 and dLT = 40. Find
the safety stock, and reorder point R,
for a 95 percent cycle-service level

Solution
Safety stock = zdLT = 1.645(40) = 65.8 or 66 units
R = Average demand during lead time + Safety stock
R = 85 + 66 = 151 units
Find the safety stock, and reorder point R, for an 85
percent cycle-service level.
Safety stock = zdLT
=1.04(40)
= 41.6 or 42 units
R = Average demand during lead time + Safety stock
R = 85 + 42
= 127 units

Reorder point for variable

Demand
For

the ePaint Internet store ,we assume

that the daily demand for Ironcoat paint is
normally distributed with a average daily
demand of 30 gallons and a standard
deviation of 5 gallons of paint per day.The
lead time for receiving a new order of
paint is 10 days.Determine the reorder
point and safety stock if the store wants a
service level of 95%--that is,the
probability of a stockot is 5%.

Solution
d

= 30 gallons per day

L = 10 days
= 5 gallons per day
For the service level,the value of z (from the
ormal table in appendix A) is 1.65.the safety
stock is:
Safety Stock = zd ( L)
= (1.65)(5)(10)
= 26.1 gallons

Cont
The

reorder point is computed as follows:

R = dL + safety stock
= 30(10) + 26.1
= 326.1 gallons

Prepared by: Group no.11