The injection molding department of a company uses an average of 30 gallons of special lubricant a day. The supply of the lubricant is replenished when the amount on hand is 170 gal. It takes four days for an order to be delivered. Safety Stock is 50 gallons, which provides a stockout risk of 9%. What amount of safety stock would be needed if the acceptable risk is 3%. Explain.
Safety stock is kept into the companies to save the inventory from being out of stock or any other variation or uncertainties. In case of such incidents, safety stock is used.
Answer and Explanation:
Service level = 91% , Z at 91% = 1.34
Safety stock = z * Standard deviation of lead time
69 = 1.34 * x
x = 51.49254
When the service level is 97%
z = 1.88
Safety Stock = 1.88 * 51.49254 = 96.80597
Z value is derived form z-table for every service level.
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from Finance 101: Principles of FinanceChapter 19 / Lesson 8