Reorder Point Under a Supplier Lead-Time Change
You stock a brake caliper that sells an average of 4 units per week with a standard deviation of 2 units. Your supplier's lead time was 5 days but has just moved to 12 days because the part is now sourced from a regional warehouse. You currently reorder when on-hand hits 6 units and order in lots of 10. The part costs $62 and you carry about $1,900 in this line. A fleet account has hinted it may increase orders but has not committed. You want a 95% service level (z ≈ 1.65).
1. Calculate a defensible reorder point and explain the inputs.
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Convert demand to the lead-time unit: 4 units/week ≈ 0.57 units/day. Over a 12-day lead time, average demand is about 6.9 units. Safety stock = z × standard deviation of demand over lead time. Using the weekly sigma of 2 scaled to 12 days: 2 × sqrt(12/7) ≈ 2.6, so safety stock ≈ 1.65 × 2.6 ≈ 4.3 units. Reorder point ≈ 6.9 + 4.3 ≈ 11 units. The current trigger of 6 is well below this and will stock out under the longer lead time.
2. The fleet account may increase orders. How does that uncertainty affect your decision, and what do you do with the $1,900 investment?
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Uncommitted upside demand argues for not over-ordering on speculation; raise the reorder point and safety stock to the calculated level, and hold the order quantity near 10-12 units until the fleet commits in writing. If the fleet confirms volume, recalculate with the new average and consider a larger lot to cover the longer lead time. Keep the dollar investment roughly stable by trimming a slower SKU rather than adding capital blindly.
3. What would you monitor to know the new settings are working?
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Track stockout incidents, fill rate on this part, and weeks of supply. If stockouts persist, the demand estimate or lead time is wrong and should be revised. If on-hand climbs steadily, the order quantity is too high. Review after one full lead-time cycle (about 12 days) and again at 60 days.