Lastly, as VP my recommendation would be to head up the medium scale expansion due to its
higher expected profit yield and lower risk.
Case 2: Kyle Bits and Bytes
Kyle Bits and Bytes is a retailer of computing products. Kyle’s most popular product is
an HP laser printer.
For this product, average weekly demand is 200 units, and lead time is one
week. However, demand is not constant. Kyle has observed that weekly demand standard
deviation is 30. Kyle need to know when should they place order (i.e. reorder point), and
inventory level so that there is stock-out.
If Kyle is not able to fulfill an order due to stock-out,
Kyle will lose that sale and possibly additional sale.
Kyle has set maximum acceptable
probability of stock-out in any week to 6%. With this target, Kyle wants to know what should be
the re-order point and how many HP laser printers should be in stock.
Kyle Bits and Bytes have a point in their stock in which a reorder of a product should be
placed. This reorder point is driven by the demand of the product. There in this case the demand
of the product is the variable. For variable demand, it is assumed that demand can be described
by a normal distribution. The average demand for the lead tine is the sum of average daily
demand for the number of days in lead time period. This can be calculated by multiplying
average daily demand by the lead time.
The variance of the distribution is calculated as the sum
of daily variance for the number of days in lead time.

5
According to Russell and Taylor (p.147), the reorder point R = dL + z*σ*√L, Where as d =
Average daily demand, L = lead time, σ = Standard deviation of daily demand, z = Number of
standard deviations corresponding to the service level probability (Russell & Taylor, 2011).
In
the case of Kyle Bits and Bytes, d = 200/7 units, L = 7 days and σ = 30/7.
Maximum accepted
probability of stock out is 6%. It means, service level is 0.94, in addition the using z-table is used
to determine the corresponding z- value and in this case it is observed to be 1.56. Therefore
following the formula below Kelly will place a reorder of the product when inventory reached
218 units.