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PAID Distributors, Inc. applies a periodic review policy (fixed interval policy) to manage its inventory. For...

PAID Distributors, Inc. applies a periodic review policy (fixed interval policy) to manage its inventory. For a certain product, PAID reviews its inventory every 30 days and places an order at that time. The lead time for delivery once the purchase order is placed with the supplier is 6 days. PAID would like to maintain a service level of at least 98%. It currently purchases the item from the supplier for $5.00 each and sells it for $7.00 each. Average daily demand is 20 units and the standard deviation of daily demand is 4 units. Which of the following would be the correct base stock (target level) of inventory for the PAID?

A.

740 units
B.

769 units
C.

1015 units
D.

1480 units
business   Operations-Management   
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Answer #1

Target level of inventory = daily demand*(review period + lead time)+z*standard deviation of demand*sqrt(review period + lead time)

=20*(30+6)+normsinv(0.98)*4*sqrt(30+6)
= 769.2899739 units

So correct answer is B. 769 units (Approximately)

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