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Ned's Natural Foods sells unshelled peanuts by the pound. Historically, Ned has observed that daily demand is normally distributed with a mean of 80 pounds and a standard deviation of 10 pounds. Lead time also appears normally distributed with a mean of eight days and a standard deviation of one day. What ROP would provide a stockout risk of 10 percent during lead time?

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Answer: 749 units

Explanation:

The formula for the Re-Order Point is;

ROP = d(LT) + z√( LTσd²+ d² σLT²)

Where,

d is demand

LT is lead time

σd is standard deviation of daily demand

σLT is standard deviation of lead time

As the stockout risk is to be 10%, z will be a service level of 90% which is ±1.28

ROP = 80(10) + 1.28√( 8(10)²+ 80² * 1²)

= 800 + 1.28√( 800 + 6400)

= 748.61

= 749 units

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