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Troy Enterprises uses a continuous review inventory control system. The firm operates 50 weeks per year, with an annual demand of 50,000 units, an ordering cost of $35 per order, a holding cost of $1 per unit per year, a lead time of 3 weeks, and a standard deviation of demand during lead time equal to 216.51 units. what is safety stock for the firm if a 94% service level is desired?

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hyderali230

Answer:

Safety Stock is 336.62 units

Explanation:

As per given data

Demand = D = 50,000

Ordering Cost = S = $35

Holding Cost = H = $1 per unit per year

Weekly Demand = Demand / 50 weeks = 50,000 / 50 = 1,000 units per week

Weekly Demand during Lead time of 3 weeks = 1000 x 3 = 3,000 units

Standard Deviation = 216.51 units

Desired Service level = 94%

The Z score at 94% service level is 1.55477  

Safety Stock = Zscore x standard deviation = 1.55477 x 216.51

Safety Stock = 336.62

The Safety Stock for the firm if a 94% service level is desired is 336.62 units

Calculation of the safety stock:

Since

Demand = D = 50,000

Ordering Cost = S = $35

Holding Cost = H = $1 per unit per year

Now

Weekly Demand = Demand / 50 weeks

= 50,000 / 50

= 1,000 units per week

Now

Weekly Demand during Lead time of 3 weeks

= 1000 x 3

= 3,000 units

Standard Deviation = 216.51 units

Desired Service level = 94%

Also, The Z score at 94% service level is 1.55477  

So,

Safety Stock = Zscore x standard deviation

= 1.55477 x 216.51

= 336.62

hence, The Safety Stock for the firm if a 94% service level is desired is 336.62 units

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