Reference no: EM132152969
PART I
The Waterworks Plumbing Supply Company stocks thousands of plumbing items sold to regional plumbers, contractors and retailers. James Sullivan, the firm’s general manager, wonders how much money could be saved annual if an Inventory Model was defined/used instead of the firm’s present rules of thumb, to determine an Optimal Inventory Policy. He instructs Mike Wazowski, an inventory analyst, to conduct an analysis of one material only (Material #3925, a brass valve) to see if significant savings may result. Material #3925 is externally sourced. Mike develops the following estimates from accounting information:
Annual Demand = 10,000 valves per year
Present (or current) order Quantity = 400 valves per order
Cost per valve = $1.60
Annual Inventory Holding Rate = 25%
Ordering Cost (per order) = $5.50
PART II
The Waterworks Plumbing Supply Company has an adjacent production department that could produce the #3925 valve. If the valves were produced in-house in production lots, they would flow gradually into inventory at the main warehouse for use. Because the valves actually flow into inventory rather than being received all at once as a batch, James Sullivan wonders how this would affect the order quantity and total cost. Mike Wazowski develops the following estimates from accounting information:
Annual Demand = 10,000 valves per year
Cost per valve = $1.60
Annual Inventory Holding Rate = 25%
Setup/Ordering Cost (per order) = $5.50
Working Days per Year = 250
Annual Production Rate (or Capacity) = 30,000 units
PART III
James Sullivan, the firm’s general manager, is approached by a supplier of #3925 valves offering quantity discounts, ultimately forcing a ‘Make vs. Buy’ decision: continue in-house production/sourcing or contract with the supplier in question (i.e., outsource). Accordingly, he must determine both the quantity and method of delivery (i.e., either orders received gradually or orders received all at once) for one material. And, consequently, determine if the valves should continue to be made in-house or out-sourced.
Mike Wazowski develops the following estimates from accounting information:
Annual Demand = 10,000 valves per year
Cost per valve = $1.60
Annual Inventory Holding Rate = 25%
Ordering Cost (per order) = $5.50
Working Days per Year = 250
The supplier’s quantity discount schedule is:
Range of Order Quantities Discount % Unit Cost
1 to 399 0% $1.70
400 to 699 4% $1.632
700+ 6.75% $1.585
PART IV
The Waterworks Plumbing Supply Company stocks thousands of plumbing items sold to regional plumbers, contractors and retailers. James Sullivan, the firm’s general manager, wonders how much money could be saved annual if an Inventory Model was defined/used instead of the firm’s present rules of thumb, to determine an Optimal Inventory Policy. Material #3925 is externally sourced.
Because Waterworks supplies hundreds of regional plumbers, contractors and retailers, their operation experiences a probabilistic demand; in fact, the number of units demanded varies considerably from day-to-day and from week-to-week. Historical sales data (for Material #3925) indicate that demand during a one-week lead time can be described as having a Normal Probability Distribution with a mean of 190 units and a standard deviation of 35 units (1 unit = 1 brass valve, Material #3925).
Mike Wazowski develops the following estimates from accounting information:
Cost per valve = $1.60
Annual Inventory Holding Rate = 25%
Ordering Cost (per order) = $5.50
Working Days per Year = 250
Lead Time = 5 days
James Sullivan is willing to tolerate a stock-out rate of 5%. What is the recommended inventory decision (i.e., the order quantity and the reorder point)? And, how much Safety Stock will be made available to absorb higher-than-usual demand during the lead time? What is the associated cost of the Safety Stock? Finally, what is the anticipated Total Annual Cost for this inventory system/policy?