Standard Normal Probability Distribution Standard Normal Probability Distribution

 Example: Pep Zone  Example: Pep Zone

Pep Zone sells auto parts and supplies including It has been determined that demand during
a popular multi-grade motor oil. When the stock of replenishment lead-time is normally distributed
this oil drops to 20 gallons, a replenishment order is with a mean of 15 gallons and a standard deviation
placed. of 6 gallons.
The store manager is concerned that sales are The manager would like to know the probability
being lost due to stockouts while waiting for a of a stockout during replenishment lead-time.
replenishment order.

In other words, what is the probability that demand during lead-

time will exceed 20 gallons?

P(x > 20) = ?

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Standard Normal Probability Distribution Standard Normal Probability Distribution

 Solving for the Stockout Probability  Cumulative Probability Table for

the Standard Normal Distribution
Step 1: Convert x to the standard normal distribution.
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
. . . . . . . . . . .
z = (x - )/ .5 .6915 .6950 .6985 .7019 .7054 .7088 .7123 .7157 .7190 .7224
= (20 - 15)/6 .6 .7257 .7291 .7324 .7357 .7389 .7422 .7454 .7486 .7517 .7549
= .83 .7 .7580 .7611 .7642 .7673 .7704 .7734 .7764 .7794 .7823 .7852
.8 .7881 .7910 .7939 .7967 .7995 .8023 .8051 .8078 .8106 .8133
Step 2: Find the area under the standard normal .9 .8159 .8186 .8212 .8238 .8264 .8289 .8315 .8340 .8365 .8389
curve to the left of z = .83. . . . . . . . . . . .

P(z < .83)

Note that all the probabilities in this table is added by 0.5 when compared to your book table

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 Cumulative Probability Table for the Standard Normal Standard Normal Probability Distribution
Distribution (As the table in your book)
 Solving for the Stockout Probability

Step 3: Compute the area under the standard normal

curve to the right of z = .83.

P(z > .83) = 1 – P(z < .83)

= 1- .7967
= .2033

Probability
of a stockout P(x > 20)

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 Standard Normal Probability Distribution Standard Normal Probability Distribution

 Solving for the Stockout Probability  Standard Normal Probability Distribution

If the manager of Pep Zone wants the probability
Area = 1 - .7967 of a stockout during replenishment lead-time to be
Area = .7967 no more than .05, what should the reorder point be?
= .2033
---------------------------------------------------------------
(Hint: Given a probability, we can use the standard
normal table in an inverse fashion to find the
corresponding z value.)
z
0 .83

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Standard Normal Probability Distribution Standard Normal Probability Distribution

 Solving for the Reorder Point  Solving for the Reorder Point

Step 1: Find the z-value that cuts off an area of .05

in the right tail of the standard normal
Area = .9500 distribution.
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
Area = .0500 . . . . . . . . . . .
1.5 .9332 .9345 .9357 .9370 .9382 .9394 .9406 .9418 .9429 .9441
1.6 .9452 .9463 .9474 .9484 .9495 .9505 .9515 .9525 .9535 .9545
1.7 .9554 .9564 .9573 .9582 .9591 .9599 .9608 .9616 .9625 .9633
1.8 .9641 .9649 .9656 .9664 .9671 .9678 .9686 We
.9693look up.9706
.9699
z the.9756
1.9 .9713 .9719 .9726 .9732 .9738 .9744 .9750 complement
.9761 .9767
0 z.05 of the tail area
. . . . . . . . . . .
(1 - .05 = .95)

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Standard Normal Probability Distribution Normal Probability Distribution

 Solving for the Reorder Point  Solving for the Reorder Point

Step 2: Convert z.05 to the corresponding value of x. Probability of no

Probability of a
stockout during
stockout during
replenishment
x =  + z.05 replenishment
lead-time = .95
lead-time = .05
 = 15 + 1.645(6)
= 24.87 or 25

A reorder point of 25 gallons will place the probability

of a stockout during leadtime at (slightly less than) .05. x
15 24.87

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 Standard Normal Probability Distribution Normal Approximation of Binomial Probabilities

 Solving for the Reorder Point

When the number of trials, n, becomes large,
By raising the reorder point from 20 gallons to evaluating the binomial probability function by hand
25 gallons on hand, the probability of a stockout or with a calculator is difficult.
decreases from about .20 to .05.
This is a significant decrease in the chance that The normal probability distribution provides an
Pep Zone will be out of stock and unable to meet a easy-to-use approximation of binomial probabilities
customer’s desire to make a purchase. where np > 5 and n(1 - p) > 5.

In the definition of the normal curve, set

 = np and   np(1  p)

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Normal Approximation of Binomial Probabilities

Add and subtract a continuity correction factor

because a continuous distribution is being used to
approximate a discrete distribution.

For example, P(x = 12) for the discrete binomial

probability distribution is approximated by
P(11.5 < x < 12.5) for the continuous normal
distribution.

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