Question

Bed Bath & Microwaves has problems with its best-selling microwave—the SonicMicrowave. Hank, the owner, tells you that he always seems to have too many or too few of the SonicMicrowave. He has hired you to help determine how much and when to order. At the same time, the company is considering quotes from 2 different suppliers, and you will help compare suppliers. You estimated the following information from the detailed records that Hank kept on the microwave. You calculated the standard deviation of daily demand to be able to estimate the variation of demand during lead time—useful for calculating the amount of extra microwaves to have on hand to minimize stockouts that plagued Hank. Hank wanted to have the SonicMicrowave available no less than 95% of the time.

Requirements (annual forecast)	4,000	units
Average daily demand	10.96	units (365 days)
Standard deviation of daily demand	0.27
Order processing cost	220	per order
Annual inventory holding cost factor	35%	per year

Description	Supplier 1	Supplier 2
Per unit price of microwave	225	245
Average lead time in days	4.00	3.00
Standard deviation of lead time days	0.75	1.13

Note, do the interim calculations first and then use this supporting data in the total cost calculations. For instance, use number of orders (rounded) to calculate order cost. Round all answers to the nearest whole number.

Interim calculations	Supplier 1	Supplier 2
EOQ	149
Number of orders	27
Number of units for safety stock	14
Reorder point with safety stock	58
Total Cost Calculations	Supplier 1	Supplier 2
Total purchasing cost	$ 900,000	$
Ordering cost	5,940
1st year cost of safety stock	3,150
Holding cost of safety stock	1,103
Holding cost of cycle stock	5,867
TOTAL COST	$ 916,060	$ 998,906

Answer 1

SUPPLIER 2

where, D- annual demand (units)

S- cost per order($)

H- holding cost ($) = I x C

where I - holding cost (%) and C is cost per unit ($)

therefore

{ here we get H = 245 X 0.35 = 86 }

  

2. NUMBER OF ORDERS = ANNUAL DEMAND / QUANTITY PER ORDER (EOQ)

  = 4000/ 143

= 28

3. SAFETY STOCK = ( MAX. DAILY USAGE x MAX LEAD TIME IN DAYS) - (AVG DAILY USAGE X AVG LEAD TIME IN DAYS)

= (11 x 4) - (11x 3)

= 44-33

= 11

4. REORDER POINT = (AVG DAILY SALES IN UNITS X DELIVERY LEAD TIME ) + SAFETY STOCK

= (10.96 x 3) + 11

= 44

5 . TOTAL PURCHASING COST(TC) = PD + HQ/2 + SD/Q

HERE, P = 245; D= 4000 ; H = 86 ; Q = 143; S= 220

= (245 x 4000) + (86 x 143/ 2) + (220 x 4000/ 143)

= 980000 + 6149 + 6153.8

= 992302.8

= 992303

6. ANNUAL ORDERING COST = NO. OF ORDERS PER YEAR X ORDERING COST

= 28 x 220

= 6160