Verity Insurance distributes insurance products across US. One SKU family accounts for a disproportionate share of complaints.
Demand averages 2858 units a week with a standard deviation of 486 units. Replenishment lead time is 8 weeks and has itself been slipping. Each unit costs $2013 to buy and carries at roughly 23% a year once warehousing, insurance and capital are counted. Gross margin is 33%.
The line currently stocks out about 10% of weeks. Sales say every stockout sends a customer to a competitor. Finance say inventory is already too high.
Advise the operations director. Your answer should provide:
State any assumptions you make.
80 points, 60% to pass.
Reorder point = mean demand over lead time + z x std dev over lead time. Trade the holding cost of safety stock against lost margin on stockouts.