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. (10 points)
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? (Hint: Use the fillrate/SL annual formula to find your answer)
c. What is the safety stock for part (b)? If holding cost= $5/unit/year, what is the extra cost due to the uncertainty of demand?