Question 5 Safety Stock Model  Consider the following information on an inventory management system (one year is 50 weeks, one year is 365 days and 1 week is 7 days): Item Cost:​​​$10 ​​Order Cost:​​​$250 ​​Annual Holding Cost:​​33% of item cost ​​Average Demand:​​515 per week ​​Std. Dev. of Demand:​​125 per week ​​Lead time:​​​14 days   a)  Ignoring the uncertainty in the demand (i.e. looking only at average values), find the optimal order quantity and the reorder point.   b) Consider now the uncertainty. The order quantity remains the same. If the target is to have a 98% annual service level, what should be the ROP? What is the safety stock?   c)  If the ROP is 1178 units (note that z value has been changed), what is the corresponding annual service level that the firm can provide?

Understanding Business
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Author:William Nickels
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Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
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Question 5 Safety Stock Model 
Consider the following information on an inventory management system (one year is 50 weeks, one year is 365 days and 1 week is 7 days):
Item Cost:​​​$10
​​Order Cost:​​​$250
​​Annual Holding Cost:​​33% of item cost
​​Average Demand:​​515 per week
​​Std. Dev. of Demand:​​125 per week
​​Lead time:​​​14 days
 
a)  Ignoring the uncertainty in the demand (i.e. looking only at average values), find the optimal order quantity and the reorder point.
 
b) Consider now the uncertainty. The order quantity remains the same. If the target is to have a 98% annual service level, what should be the ROP? What is the safety stock?
 
c)  If the ROP is 1178 units (note that z value has been changed), what is the corresponding annual service level that the firm can provide?
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