Probability of stockout.
The injection molding department of a company uses 40 pounds of a powder a day. Inventory is reordered when the amount on hand is 240 pounds. Lead time averages five days. It is normally distributed abd has a standard deviation of two days. What is the probability of a stockout during lead time?
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This is a good question and the answer can be based on math and other possible variables. I will give a mathematical answer first and then a practical one.
If the company uses 40 pounds of power a day, and that company orders more when they are at 240 pounds and the lead time is five days, then from a mathematical point of view, they should never have a shortage. As soon as they have 240 pounds on hand they get another shipment in five days. On that fifth day, they will have 40 pounds left.
With that said, life never works out as we expect. There can be times when a company is doing extremely well and they use 100 pounds in one day. If they have a few days of this, then they will run out. There can also be accidents, which rendered some of the powder unusable. There can be many more scenarios.
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