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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 BytesKyle 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.
5According 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 usedto 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.