Question

Ford and GM carry spare parts for their dealers at a third party warehouse in the Upper Peninsula (UP) of Michigan. Demand for Ford spare parts is 100 units per month while demand for GM parts is 120 per month. Each spare part costs $100 and both companies have a holding cost of 25 percent. Currently, each company uses a separate truck to ship these parts. Each truck has a fixed cost of $650.

a)What is the annual ordering and holding cost (sum of the two costs) for each company?

The cost for Ford =.

The cost for GM = .

A 3rd party logistics provider has offered to combine shipments for each of the two companies on a single truck. This will increase the cost of each truck to $800.

b)If the two companies agree to the joint shipment, what is the optimal order frequency

The frequency n =.

c)What is the annual ordering and holding cost for the two companies combined?

Cost for two companies combined =.

Answer 1

Answer to question (a):

Annual ordering cost = Cost per order x Total quantity

order size

In case of Ford (a)cost per order =$560

(b) Total quantity = 100 p.m. x 12 months = 1200 units

(c) Order size per batch = 100 units

Annual ordering cost = $560 x 1200 / 100 = $ 6720

In case of GM (a)cost per order =$560

(b) Total quantity = 120 p.m. x 12 months = 1440 units

(c) Order size per batch = 120 units

Annual ordering cost = $560 x 1440/120 = $ 6720

Holding costs are 25 percent, hence it will be $ 6720 x 25% = $1680