Reference no: EM132096777

Late in the year, Steve Enriquez, store manager of Greenhills Computers, Inc., was requested by the company’s owner to improve the computer shop’s inventory management. Enriquez was aware that competition among shops like Greenhills Computers that sold fully built-up computer units had intensified. Profit margin were so thin that any improvement in operating efficiency would improve the bottom line.

Enriquez began by studying the high value, large volume products. The leading product of Greenhills Computers was the Starplus laptop computer. The shop purchased Starplus from the manufacturer, Star (Phils.), Inc., a local company that assembled components supplied by its mother company in South Korea. Greenhills Computers was only one of the many outlets of Starplus laptops. The Starplus brand had been accepted by the market for its versatility, power and convenience features. It was second only to Powermate of Texas Instruments in these features.

Starplus’ laptop ran in either Intel 486DX or Intel Pentium chip. Its standard features were 8MB memory on board, color VGA monitor, built-in mouse, 3-1/2” floppy disk, and 1 giggly hard disk. Greenhills Computers sold them at a retail unit price of P75,000. Its purchase cost was 62,500. In price, Starplus was one of the laptop brands with the best value for money.

Greenhills Computers forecast its sales in the following yer at 6,000 units. There was a seasonal pattern in its sales. About one-third of total sales came in the last quarter of the year during the holiday season. Sales were evenly distributed in other months. Enriquez expected this seasonality to continue through to next year.

Greenhills Computers purchased its requirements at the start of the quarter during the off season (January-September) and monthly during the peak season (October-December). Its storeroom could not handle more than 1,000 units laptops at any one time. Star (Phil.) required a minimum order of 250 units. It charged a fee of P 3,000 for each order because it assigned one or two technicians, depending on the size of the order, to set up each laptop.

Star (Phils.) took from seven to 14 days to deliver orders. Enriquez observed that customers were impatient when buying laptop computers. He could not hold customers and ask them to wait one or two weeks for delivery. The Starplus brand was commonly available in other shops and customers could easily buy from them rather than wait for up to two weeks for delivery. It was for this reason that Enriquez set the present quarterly purchasing policy to monthly. He observed that the shop almost never ran out of stocks under this purchasing policy.

The carrying cost of laptop computers were relatively high. Proper storage, physical safeguards, insurance and handling requirements raised the carrying cost to about 12 percent of inventory cost. Greenhills Computers had its own computer-based inventory recording and control system. Through this system, Enriquez kept track of deliveries, sales and inventory items.

Enriquez wanted to consider the economic order quantity (EOQ) model in order to improve the inventory management at the shop. He thought several issues might complicate a direct application of the EOQ model as he learned while studying for his MBA at Oregon State University (1990). These issues concerned the quantity discounts offered by Star (Phils.), the uncertainty in delivery time by Star (Phils.) and in customer sales, and the company’s efforts to reduce carrying costs.

Star (Phils.) offered a 1 percent discount for purchases exceeding 250 units, 3 percent for orders exceeding 500 units, and 5 percent for orders exceeding 750 units. These discounts were offered only during the months of January to September because Star (Phils.) wanted to unload its stocks during this period. The discount policy was expected to continue through to next year. Enriquez wondered how he could apply the EOQ model when discounts were offered in three layers.

Greenhills Computers did not have any policy on safety stocks. When stocks were about to run out. Enriquez simply sent an order marked “RUSH” to Star (Phils.). Since he ordered only six times a year, Enriquez did not face any “stock out” situation last year. He figured than an EOQ model would tighten up the relation between his stocks and customer sales. Enriquez wondered whether it was time the company had a real safety stock policy.

Enriquex thought that carrying costs were rather high. He had been very conservative in controlling stocks and in ensuring them against risk. He had seen many computer shops fold up because of poor inventory controls . Enriquez set up intricate controls for laptop computers because they carried the highest value despite being small products of the company physically.

For this year, Enriquez planned to relax some of those controls and to shop around for security devices and lower insurance premium. Enriquez believed that he could reduce carrying costs to 10 percent by June next year. He was optimistic about reducing the carrying cost to 8 percent of inventory cost by the beginning of next year’s peak season in October. The owners required a rate of return of 15 percent. All other costs of running the business were fixed.

QUESTION:

How should the EOQ model be applied under the following conditions:

a. Sales is seasonal

b. Suppliers offer different level discount

Calculate the EOQ for laptop computers for Greenhills Computers using the approach recommended above.