IM Systems assembles microcomputers from generic components

IM Systems assembles microcomputers from generic components. It purchases flat screen monitors from a manufacturer in Taiwan; thus, there is a long lead time of 25 days. Daily demand is normally distributed with a mean of 3.5 monitors and a standard deviation of 1.2 monitors. The company maintains a 90% customer service level. How much safety stock of monitors should IM Systems hold?

When should IM Systems reorder the monitors?

Solution

Given,

Standard deviation of daily demand = 1.2 monitors

Lead time of delivery of monitors = 25 days

Therefore, Standard deviation of demand during lead time

= Standard deviation of daily demand x Square root ( Lead time )

= 1.2 x Square root ( 25)

= 1.2 x 5

= 6 monitors

Required service level = 90%

i.e instock probability = 0.90

Corresponding Z value for in stock probability of 0.90 = NORMSINV ( 0.90 ) = 1.2815

Therefore,

Required safety stock

= Z value x standard deviation of demand during lead time

= 1.2815 x 6

= 7.689 ( 8 rounding to next higher whole number )

REQUIRED SAFETY STOCK = 8 MONITORS

Reorder point

= Average daily demand x Lead time + safety stock

= 3.5 x 25 + 8

= 87.5 + 8

= 95.5 ( 95 rounding to nearest whole number )

IM SYSTEMS SHULD REORDER MONITOR WHEN STOCK IN HAND REACHES 95 MONITORS