Computation of Standard Deviation:
- Demand occur during the replenishment lead time is helpful in estimating the expected utilization of inventory from the time an order is placed to while it is received. For instance, if a 30-day period was utilized to calculate d, then a simple average would be
Where n is the number of days. The standard deviation of the daily demand is specified by
Since σ d refers to one day and if lead time extends over various days, we may use the statistical premise that the standard deviation of a series of independent occurrences is the square root of the addition of the variances. Mathematically specking, it can be written as
Later on we ought to find z, the number of standard deviations of safety stock. Let our probability of not stocking out during the lead time is to be 0.90. The z-value corresponding to 90 % probability of not stocking out is 1.52. The standard deviation for 5 days is then calculated as
Now, the safety stock is calculated as follows
SS = z σL = 1.52 × 22.36 = 33.9872
Now two instance are given that shall demonstrate and differentiate the variation in demand in terms of standard deviation.