Clarkson Shoe Co. produces and sells excellent quality walking shoes. After production, the shoes are distributed to 20 warehouses around the country. Each Warehouse services approximately 100 stores in its region. Clarkson uses an EOQ model to determine the number of pairs of shoes to order for each warehouse from the factory. Annual demand for Warehouse OR2 is approximately 120,000 pairs of shoes. The ordering cost is $250 per order. The annual carrying cost of a pair of shoes is $2.40 per pair.
1. Use the EOQ model to determine the optimal number of pairs of shoes per order.
2. Assume each month consists of approximately 4 weeks. If it takes 1 week to receive an order, at what point should Warehouse OR2 reorder shoes?
3. Although OR2’s average monthly demand is 10,000 pairs of shoes (120,000 =12 months), demand each month may vary from the average by up to 20%. To handle the variation in demand Clarkson has decided that OR2 should maintain enough safety stock to cover any demand level. How much safety stock should Warehouse OR2 hold? How will this affect the reorder point and reorder quantity?
4. What is the total relevant ordering and carrying costs with safety stock and without safety stock?