Question

Question #1

A bakery's use of corn sweetener is normally distributed with a mean of 80 gallons per day and a standard deviation of four gallons per day. Lead time for delivery of the corn sweetener is normal, with a mean of six days and a standard deviation of two days. If the manager wants a service level of 99 percent, calculate the following: [Note: for a 99% service level the appropriate z value is 2.33] Equations:

1. Assuming demand is constant at 80 gallons per day and lead time is variable as indicated above, what would the reorder point be?

2. Assuming lead time is constant at six days and demand is variable as indicated above, what would the reorder point be?

3. The supply chain manager for this bakery is considering two options to improve performance. Option #1 is marketing effort to gain new customers that will stabilize demand. Options #2 is a long term contract with the supplier which will guarantee delivery lead times. Which option would you recommend and why?

Answer 1

Q.1

Demand = 80 gallons per day

Average Lead time = 6 days

Standard deviation of Lead time = 2 days

z = 2.33

Reorder Point = (Demand x Average Lead Time) + ( z x Demand x Standard Deviation of Lead time)

= ( 80 x 6) + ( 2.33 x 80 x 2) = 480 + 372.8 = 852.8

Q. 2

Lead time = 6 days

Average demand = 80 gallons per day

Standard deviation of demand = 4 gallons per day

z = 2.33

Reorder Point= (Average demand x Lead time) + ( z x Standard Deviation of demand x √Lead Time)

= ( 80 x 6) + ( 2.33 x 4 x √6) = 480 + 22.83 = 502.83

Q. 3

I would recommend Option 2 to the supply chain manager.

In option 2, the supplier would guarantee delivery lead times, so the lead time would be constant.

We can see that when the Lead time is constant, the Reorder point is 502.83. On the other hand, when demand is constant, the Reorder point is 852.8

So, when the Lead time is constant the Reorder point is lower. A lower Reorder point means reordering is required when Inventories are lower, which prevents reordering too early. So, when the demand is constant, reordering has to be done when inventory comes down to 852.8, however when lead time is constant, one can wait for the Inventory to go down to as low as 502.83 to reorder.