Question

'Zen MotoCorp', a leading motorcycle manufacturer, requires batteries for its production units. The procurement lead time is two months and the demand during this period is expected to be 2000 batteries per month, making its reorder point at 4000 batteries. Fresh supplies should arrive just as the stock reaches zero. However, due to variability in the rate of demand (or consumption) as well as in the supply or manufacturing lead time etc., it may reach a zero stock status before the supply arrives. To cater to such variability, it decides to add 500 batteries to its reorder level. The reorder level would now be 4500 batteries. The addition of 500 batteries in the reorder point is known as:

• A. Average Inventory
• B. Annual demand for the item
• C. Economic Order Quantity
• D. Safety Stock

Hint:

$$\text{Reorder Point} = (\text{Lead Time} \times \text{Average Demand}) + \text{Safety Stock}$$ Safety Stock acts as an inventory insurance policy, protecting operations against unexpected supply chain delays or sudden surges in consumer demand.

Answer 1

The Correct Option is D

Step 1: Understanding Inventory Reorder Points:
In inventory management, companies must determine when to order new stock to prevent production delays. The baseline reorder point is calculated as: Reorder Point (ROP) = Lead Time Demand = Lead Time \times Daily Consumption Rate In this case, with a 2-month lead time and demand of 2,000 units/month, the baseline ROP is: Baseline ROP = 2 months \times 2,000 units/month = 4,000 batteries

Step 2: Factoring in Variability and Stockout Risks:
In the real world, daily demand rates and supplier delivery times often fluctuate. If demand spikes or deliveries are delayed, a company relying on a baseline ROP faces the risk of a stockout (running out of inventory and halting production).

Step 3: Defining Safety Stock:
To protect against these fluctuations, companies add a buffer of extra inventory to their baseline reorder level. This buffer is called Safety Stock (or buffer stock). The adjusted reorder point formula is: Adjusted Reorder Point = Lead Time Demand + Safety Stock Substituting the prompt's values: 4,500 batteries = 4,000 batteries (Lead Time Demand) + 500 batteries (Safety Stock) Therefore, the 500-battery buffer is classified as Safety Stock (D).