Company had adopted new minimum-order-size policy

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Reference no: EM132159221

Alex got a letter from Faucet Masters expressing that the company had adopted a new minimum-order-size policy. Consequently, faucet number 36543 should be ordered at a minimum of 130 units. This new requirement caught Alex by a surprise as it was about three times the amount he has been ordering. Through a quick rough calculation: (3+?)/2, Alex figured out that tripling the order quantity will raise the management cost associated with this faucet by nearly 67%. Alex was very uncomfortable with such a cost increase. Furthermore, given the current low inventory level of this item, Alex knew that a new order would have to be placed soon, and he was determined to find a resolution even sooner.

Jefferson Plumbing (Alex's company) sells a variety of plumbing supplies at its store in Richmond, Virginia. Because space is a premium in its city location, Jefferson tends to keep only small inventories and replenish them often. With an annual holding cost of $10 per unit for faucet 36543, Alex knew that increasing the order quantity to 130 will have a drastic cost impact. At the same time, he hoped that ordering a large quantity would reduce the number of orders. At an ordering cost rate of $100 per order, that may help a little. However, he was still concerned with his 67% increase estimate.

Alex asked himself, “Should I place large orders of faucet 36543, keep them in our warehouse at an annual holding rate of $1 per unit, and ship small batches to the store?” However, when Alex recalled that each time the store places an order from the warehouse there is a charge of $50, he was not as sure about the advantage of this approach.

(a) Now, when Jefferson incorporates the warehouse, (and IF he uses EOQ method), how many units should be ordered from the supplier to the warehouse? How many should be delivered from the warehouse to the store?

(b) Based on the order quantity you got from part (a) in Problem 2, please draw the Warehouse Inventory Level Pattern.

(c) Is the above Warehouse Inventory Level Pattern in part (b) of Problem 2 efficient or not? Please explain through calculation.

Reference no: EM132159221

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