CAF-5 · Chapter 17 · Question 7 of 20
(Inventory Management & Safety Stock) A company’s annual demand for a component is 120,000 units (assume 12 equal months). The cost of placing an order is Rs. 500, and the annual holding cost per unit is Rs. 1.20. The supplier’s lead time is strictly 1 month. If management decides to hold a safety stock of 2,000 units to hedge against demand spikes, what is the Re-Order Level (ROL)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 12,000 units
Explanation
Average monthly demand = 120,000 / 12 = 10,000 units. Re-Order Level (ROL) = (Average Demand * Average Lead Time) + Safety Stock. ROL = (10,000 * 1 month) + 2,000 = 12,000 units.
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