CPIM Practice Exam

Which formula correctly represents safety stock calculation?

1. Period Demand - Order Quantity

2. SD or MAD in units x appropriate service factor

3. Old Safety Stock x New Lead Time

4. Orders Per Period - Stockout Chances

The correct answer is: SD or MAD in units x appropriate service factor

The correct answer is based on the concept of safety stock as it relates to service levels and inventory management. Safety stock serves as a buffer against uncertainties in demand and lead times, ensuring that a company can meet its customer service goals without running out of stock. The formula involving the standard deviation (SD) or mean absolute deviation (MAD) in units multiplied by the appropriate service factor accurately reflects this concept. The SD or MAD provides a measure of the variability in demand, while the service factor is a multiplier that reflects the desired service level (the probability of not having a stockout during the lead time). This combination gives a calculated amount of safety stock that can effectively mitigate risks associated with demand fluctuations and lead time variability. Other options, while relevant to inventory management, do not specifically represent how to calculate safety stock. For example, subtracting the order quantity from the period demand does not incorporate the variability of demand or supply; it simply provides a measure of how much additional stock is needed based solely on orders. Similarly, multiplying old safety stock by new lead time might give a figure, but it does not take into account current demand patterns or variability. Lastly, calculating orders per period minus stockout chances does not formulate a safety stock quantity that could adapt to