Question

EOQ, uncertainty, safety stock, reorder point, 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 EGG model to determine the number of pairs of shoes to order for each warehouse from the factory. Annual demand for Warehouse 0R2 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 EGG model to determine the optimal number of pairs of shoes per order

2. Assume each month consists of approximately 4 weeks. If it takes I week to receive an order, at what point should warehouse 0R2 reorder shoes?

3. Although 0R2’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 082 should maintain enough safety stock to cover any demand level. How much safety stock should Warehouse GR2 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?

 

Answer 1

EOQ, uncertainty, safety stock, reorder point.

1.

2.

Weekly demand = Monthly demand ÷ 4

                        = 10,000 ÷ 4 = 2,500 pairs of shoes per week

Purchasing lead time = 1 week

  Reorder point = 2,500 pairs of shoes per week × 1 week = 2,500 pairs of shoes

 

3.

Safety stock = 20% × 10,000 = 2,000 pairs of shoes

 

 Reorder point = Weekly demand + Safety stock

                           = 2,500 + 2,000 = 4,500 pairs of shoes

 

 EOQ = 5,000 pairs of shoes (since neither annual demand, ordering cost, nor carrying

 cost have changed, the EOQ will not change).

4.

EOQ = 5,000 pairs of shoes (since neither annual demand, ordering cost, nor carrying