An online printing company is in the inventory planning process for the upcoming
ID: 396372 • Letter: A
Question
An online printing company is in the inventory planning process for the upcoming year. Specifically, they are deciding how to plan orders for a particular kind of card stock that is frequently used to print invitations. The printing company has usage data by quarter for this card stock and determined that every quarter, they use 12,000 boxes of card stock. We know that with the company's current supplier, they are charged $2 per card stock box and placing/processing this order results in a cost of S200/order. In addition, because this card stock must be kept in a humidity controlled warehouse, it costs S1 per box of card stock to maintain per year (regardless of the value of the card stock) The online printing company has just identified a new supplier that offers a quantity discount schedule for orders of boxes of card stock. Given that the card stock is not perishable, they are considering switching to this supplier. Although their cost to place an order and holding cost would remain the same, this supplier offers the following discount menu: Purchases under 4,000 units have a cost per unit of $2 Purchases from 4,000 units to 9,999 units receive a discount of 5%/unit Purchases from 10,000 units to 19,999 units receive an additional discount of 5%/unit (from the previous level of purchase) Purchases 20,000 units or more receive an additional discount of 5%/unit (from the previous level of purchase) " . . Which supplier should they do business with if they want to lowest cost possible? How would using the first supplier versus the quantity discount supplier impact their storage warehouse? (e.g., what maximum level of inventory should they be prepared for? Will they have to redesign if they switch suppliers? How many times a year would they need to have employees staffed for unloading shipments?) This product, purchased from either supplier, is shipped by boat from China and therefore has a long lead time of 2 months. Comparing the first supplier with the quantity discount supplier, comment on the connection between this lead time and the days of inventory held. e. f. g.Explanation / Answer
e) Annual demand, D = 12000 boxes
Ordering cost, S = $ 200
Holding cost, H = $ 1
Unit cost, C = $ 2 per box
Economic Order Quantity, Q = SQRT(2DS/H) = SQRT(2*12000*200/1) = 2191
Total annual cost of ordering from current supplier = D*C + (D/Q)*S + (Q/2)*H = 12000*2 + (12000/2191)*200 + (2191/2)*1 = $ 26191
Total annual cost of ordering 4000 units from new supplier = 12000*2*(1-5%) + (12000/4000)*200 + (4000/2)*1 = $ 25400
Total annual cost of ordering 10000 units from new supplier = 12000*2*(1-5%)*(1-5%) + (12000/10000)*200 + (10000/2)*1 = $ 26900
Total annual cost of ordering 20000 units from new supplier = 12000*2*(1-5%)*(1-5%)*(1-5%) + (12000/20000)*200 + (20000/2)*1 = $ 30697
Total annual cost of ordering 4000 units from new supplier is the lowest.
Therefore, they should do business with the new supplier.
f) Maximum level of inventory with the current supplier = 2191 boxes
Maximum level of inventory with the new supplier = 4000 boxes
Number of times unloading required per year = 12000/4000 = 3 times per year
g) The lead time of 2 months by boat will incur an additional holding cost = 12000*(2/12)*1 = $ 2000
Increased lead time means increased days of inventory held.
This makes the option of using new supplier more expensive than the current supplier.