Quantitative Business Analysis (QBA) Exam 3 Practice Test

Raising service level increases the buffer you must hold to protect against variability in demand during lead time. Service level is the probability you won’t run out before the next replenishment, so aiming for a higher probability means you need more safety stock to cover possible demand swings during that lead time. In practice, safety stock is often calculated as a form of z-score times the variability of demand during lead time (safety stock = z × sigma_L). Increasing the service level raises z, which increases safety stock. The average lead-time demand is simply the expected amount needed during the lead time, not the extra cushion you keep on hand, so safety stock is not equal to lead-time demand.