Question: Floyd Distributors, Inc., provides a variety of auto parts to small local garages. Floyd purchases parts from manufacturers according to the EOQ model and then

Floyd Distributors, Inc., provides a variety of auto parts to small local garages. Floyd purchases parts from manufacturers according to the EOQ model and then ships the parts from a regional warehouse direct to its customers. For a particular type of muffler, Floyd’s EOQ analysis recommends orders with Q* = 25 to satisfy an annual demand of 200 mufflers. Floyd’s has 250 working days per year, and the lead time averages 15 days.

a. What is the reorder point if Floyd assumes a constant demand rate?

b. Suppose that an analysis of Floyd’s muffler demand shows that the lead-time demand follows a normal probability distribution with µ = 12 and σ = 2.5. If Floyd’s management can tolerate one stock-out per year, what is the revised reorder point?

c. What is the safety stock for part (b)? If Ch = $5/unit/year, what is the extra cost due to the uncertainty of demand?

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