Phillips Corporation is a major manufacturer of food processors. It purchases motors from Viking Corporation. Annual demand is 52,000 motors per year or 1,000 motors per week. The ordering cost is $360 per order. The annual carrying cost is $6.50 per motor. It currently takes 2 weeks to supply an order to the assembly plant.
Required:
1. What is the optimal number of motors that Phillips's managers should order according to the EOQ model?
2. At what point should managers reorder the motors, assuming that both demand and purchase-order lead time are known with certainty?
3. Now assume that demand can vary during the 2-week purchase-order lead time. The following table shows the probability distribution of various demand levels:
Total Demand for Motors for 2 Weeks _______ Probability of Demand (sums to 1)
1,600 ............................................. 0.05
1,800 ............................................. 0.20
2,000 ............................................. 0.50
2,200 ............................................. 0.20
2,400 ............................................. 0.05
If Phillips runs out of stock, it would have to rush order the motors at an additional cost of $5 per motor. How much safety stock should the assembly plant hold? How will this affect the reorder point and reorder quantity?