EOQ, uncertainty, safety stock, reorder point.Stewart Corporation is a major automobile
manufacturer. It purchases steering wheels from CoaseCorporation. Annual demand is 10,400 steering
wheels per year or 200 steering wheels per week. The orderingcost is $100 per order. The annual carrying
cost is $13 per steering wheel. It currently takes 1.5 weeks tosupply an order to the assembly plant.
1. What is the optimal number of steeringwheels that Stewart’s managers should order according to the
EOQ model?
2. At what point should managers reorder thesteering wheels, assuming that both demand and purchase-
order lead time are known with certainty?
3. Now assume that demand can vary during the1.5-week purchase-order lead time. The following table
shows the probability distribution of various demand levels:
Total Demand for Steering Wheels for 1.5 WeeksProbability of Demand (sums to 1)
100 0.15
200 0.20
300 0.40
400 0.20
500 0.05
If Stewart runs out of stock, it would have to rush order thesteering wheels at an additional cost of $9
per steering wheel. How much safety stock should the assemblyplant hold? How will this affect the
reorder point and reorder quantity.
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