The Starr Company manufactures several products. (he of its main products requires an electric motor. The management of Starr Company uses the economic order quantity formula (EOQ) to determine the optimum number of motors to order. Management now wants to determine how much safety stock to order. Starr Company uses 30,000 electric motors annually (300 working days). Using the EOQ formula, the company orders 3,000motors at a time. The lead time for an order is five days. The annual cost of carrying one motor in safety stock is $10. Management has also estimated that the cost of being out of stock is $20 for each motor they are short. Starr Company has analyzed the usage during past reorder periods by examining the inventory records. The records indicate the following usage patterns during the past reorder periods:
|
Usage During Lead Time
|
Number of Times Quantity Was Used
|
|
440
|
6
|
|
460
|
12
|
|
480
|
16
|
|
500
|
130
|
|
520
|
20
|
|
540
|
10
|
|
560
|
6
|
|
200
|
1. Using an expected value approach, determine the level of safety stock for electric motors that Starr Company should maintain in order to minimize costs.
2. What would be Starr Company's new reorder point?
3. What factors should Starr Company have considered to estimate the out-of-stock costs?