Reference no: EM131016421

Consider four retail outlets A, B, C and D all located in the DFW area. These outlets are owned by different companies. All these outlets stock some product X which is produced by a manufacturer in California. Assume that each outlet experiences demand at a constant rate of 250,000 units per year for this product. The unit cost for this product is $ 250 (this is the cost that the retailers pay the manufacturer). The holding cost rate is 0.2 $/$/year for all the retailers. Each time a retailer places a replenishment order with the manufacturer, the manufacturer also charges a fixed ordering cost of $ 20,000 per order irrespective of how large the order is. Since this is such a substantial cost, the retailers consider the possibility of "teaming up" through a "logistics partnership arrangement" - under this arrangement, aggregate orders (on behalf of "Team ABCD") are placed on the manufacturer - the delivery is accepted by a 3rd party in the DFW area who then makes the individual deliveries to A, B, C and D. Let us say that the 3rd party requires an annual service fee of F dollars to provide this service (i.e. each of A, B, C and D spends F/4 dollars on this service annually). How large can F be for this arrangement to be beneficial to the retailers?