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Hi,
I am struggling with which formula to use to answer this question, also what is meant by ‘safety inventory’? please can you help?
“For a particular component, the re-order quantity is 6000 units and the average inventory holding is 3,400 units.
What is the level of safety inventory (in whole units)?
Safety (or buffer) inventory is extra inventory being held over and above what is expected to be needed (just to be safe).
If the reorder quantity is 6,000 then it means that the average inventory (as always) should be 6,000 / 2 = 3,000. Since in fact they have average inventory of 3,400 it means that they are carrying 400 more than they expect to need. So 400 is the level of safety inventory.
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