Question: Dunstreet's Department Store would like to develop an inventory ordering policy with a 95 percent probability of not stocking out. To illustrate a recommended procedure,

Dunstreet's Department Store would like to develop an inventory ordering policy with a 95 percent probability of not stocking out. To illustrate a recommended procedure, use as an example the ordering policy for white percale sheets. Demand for white percale sheets is 5,000 per year. The store is open 365 days per year. Every two weeks (14 days) inventory is counted and a new order is placed. It takes 10 days for the sheets to be delivered. Standard deviation of demand for the sheets is five per day. There are currently 150 sheets on hand. What should be the target level? (That is, we need to meet the demand over 24 days (order cycle + lead time), with a probability of not stocking out at 95%. The mean demand is (24)(5000/365) = 329 sheets, standard deviation of demand = 5(square root of 24) = 24.5 sheets.

How many sheets should we have to meet the 24 day demand with a 95% chance of not stocking out?)

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