Economic Order Quantity:
Assume an economic order quantity case where annual demand D = 500 units, economic order quantity Q = 100 units, the wanted probability of not stocking out P = 0.95, the standard deviation of demand during lead time σ L = 20 units, and Lead time L = 12 days. Discover the reorder point. Suppose that demand is over a 250 = workday year.
d' in above example is
d = 500 /250 = 2 and lead time is 12 days.
From the equation,
R = d'L + z σL = 2 (12) + z (20)
Since, in this case z is 1.64. Substituting this value of z, we achieved
R = 2 (12) + 1.64 (20) = 24 + 32.8 = 56.8 units
This illustrated that when the stock on hand gets down to 56 units, order 100 more.