CPIM Practice Exam

The new safety stock is calculated using the approach that involves the old safety stock multiplied by the square root of the new lead time. This method stems from the relationship between safety stock, lead time, and variability in demand. Safety stock is designed to protect against uncertainties in demand and supply; hence, it is closely tied to lead time.

When the lead time changes, the variability or uncertainty also changes. The square root of the lead time is used because lead time affects inventory levels in a way that is proportionate to the square root of the lead time due to the statistical nature of demand and supply variability. This relationship accounts for how risk accumulates over time; as lead time increases, the risk of stockouts increases proportionally with the square root of that lead time.

Thus, by using the square root of the new lead time in the calculation, the method effectively adjusts the safety stock to account for the increased time during which demand variability may occur, ensuring that there is adequate stock on hand to meet demand during that period. This results in a more accurate calculation of the safety stock necessary to mitigate risks associated with having too little inventory during unforeseen fluctuations in demand or supply.