CPIM Practice Exam

How is the target level replenishment formula calculated?

1. Demand per period x lead time duration

2. Demand per period x (review period duration + lead time duration) + safety stock

3. Average inventory x lead time duration

4. Total stock - remaining inventory

The correct answer is: Demand per period x (review period duration + lead time duration) + safety stock

The target level replenishment formula is designed to ensure that inventory levels are sufficient to meet future demand while accounting for variability in lead times and demand. The correct answer involves calculating the demand per period multiplied by the sum of the review period duration and the lead time duration, and then adding safety stock. This approach captures all the essential elements that influence inventory levels. By incorporating demand per period, the formula ensures responsiveness to customer needs. The review period duration accounts for the time until the next inventory review, while the lead time duration incorporates the time necessary to replenish stock after an order is placed. Including safety stock is crucial as it provides a buffer against uncertainties, such as fluctuations in demand or delays in supply. In contrast, the other options lack the comprehensive consideration of both the review period and safety stock. For instance, simply multiplying demand per period by lead time duration does not account for the full time frame needed to replenish stock when also considering regular review cycles. Thus, the option that accurately incorporates all these factors is the most valid choice for calculating target level replenishment.