The average demand rute for a particular raw material for a company is...
Analysis of Raw Material Demand and Procurement
Demand Rate
- The average demand rate for the raw material is 1000 times per month
- The distribution of demand rate is normally distributed with a standard deviation of 200
Lead Time
- The average load time for the procurement of the raw material is approximately 3 months
- The normally approximated lead times have a standard deviation of 1 month
Service Level
- The service level is to be 95%
Explanation
To ensure a service level of 95%, the company needs to maintain enough inventory to cover the demand during the lead time. The safety stock required can be calculated using the following formula:
Safety Stock = Z x Standard Deviation x Square Root of Lead Time
Where Z is the number of standard deviations required for the desired service level. For a 95% service level, Z is 1.65.
Using the above formula, the safety stock for the raw material can be calculated as:
Safety Stock = 1.65 x 200 x Square Root of 3
= 581.94
Therefore, the company needs to maintain a safety stock of 582 units to ensure a service level of 95%. This safety stock can be added to the reorder point, which is the level of inventory at which the company needs to place an order for the raw material.
In conclusion, the company needs to maintain a safety stock of 582 units to ensure a service level of 95% for the raw material. This will help the company to avoid stockouts and ensure timely procurement of the raw material.