Question

A particular type of rubber is used in the production of tennis balls and the company must decide on three different suppliers. Supplier A will sell the rubbers for $1.50 per rubber and will not accept any orders fewer than 7,000. Supplier B will sell the rubbers for $1.40 each but will not consider an order for greater than 8,500 rubbers, and Supplier C will sell the rubbers for $1.35 each but will not accept an order for greater than 9,000 rubbers. Assume an order setup cost of $150 and an annual requirement of 60,000 rubbers. Assume a 20 percent annual interest rate for holding cost calculations. a. Which suppliers should be selected and what is the size of the standing order? b. What is the optimal value of the holding and setup costs for rubbers when the optimal source is used? c. If the replenishment lead time for rubbers is three months, determine the reorder point based on the on-hand level of inventory of rubbers.

Answer 1

a) To determine which supplier should be selected, we need to calculate optimal order quantity.

Supplier A --->

EOQ = SQRT(2*D*S/H) = SQRT(2*60000*150/0.2*1.5) = 7746

Supplier B --->

EOQ = SQRT(2*D*S/H) = SQRT(2*60000*150/0.2*1.4) = 8018

Supplier C --->

EOQ = SQRT(2*D*S/H) = SQRT(2*60000*150/0.2*1.35) = 8165

Based on the above calculated quantities, Supplier A should be selected as the size of the order(7746) is matching the supply policy of the supplier(7000).

b) Total costs = Holding costs+Ordering costs = (Q/2)*H+(D/Q)*S = (7746/2)*0.2*1.5+(60000/7746)*150 = 2323.8 $

c) Lead Time L = 3 months

ROP = d*L = (60000/12)*3 = 15000