Question: EOQ, uncertainty, safety stock, reorder point. Stewart Corporation is a major automobile manufacturer. It purchases steering wheels from Coase Corporation. Annual demand is 10,400 steering wheels per year or 200 steering wheels per week. The ordering cost is $100 per order. The annual carrying cost is $13 per steering wheel. It currently takes 1.5 weeks to supply an order to the assembly plant.
1. What is the optimal number of steering wheels that Stewart's managers should order according to the EOQ model?
2. At what point should managers reorder the steering wheels, assuming that both demand and purchase-order lead time are known with certainty?
3. Now assume that demand can vary during the 1.5-week purchase-order lead time. The following table shows the probability distribution of various demand levels:
Total Demand for Steering Wheels for 1.5 Weeks Probability of Demand (sums to 1)
100 0.15
200 0.20
300 0.40
400 0.20
500 0.05
If Stewart runs out of stock, it would have to rush order the steering wheels at an additional cost of $9 per steering wheel. How much safety stock should the assembly plant hold? How will this affect the reorder point and reorder quantity.