Reference no: EM133054103
Question - A local bakery has requested your help in calculating their inventory costs for their ingredients. One such ingredient is sugar. Currently, they are using cane sugar and organic cane sugar in their recipes. The table below shows the demand parameters (assume that demand is normally distributed), the price per pound, and the supplier lead time for each type of sugar.
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Sugar type
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Average annual demand (pounds)
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St deviation of annual demand
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Price ($/pound)
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Lead time from the supplier (weeks)
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Cane sugar
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500
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40
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$1.3
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1
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Organic cane sugar
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180
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35
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$3.1
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2
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Assume that each type of sugar is shipped from a different supplier and regardless of the type, the fixed order cost is $40. The annual holding cost per pound is 20% of the price of the item. Please assume that the target probability of no stock-out is 98%.
Find the EOQ and the safety stock levels for each type of sugar.
Recent marketing surveys revealed that customers do not differentiate between products made with regular versus organic sugar. Due to cost cutting efforts, the company decided to use regular sugar in all its recipes. You may assume that one pound of organic sugar will be replaced with one pound of regular sugar and total demand for sugar will not change.
What will be the new EOQ and safety stock levels for regular cane sugar?
Compare the total annual cost of part (a) and (b) and determine how much money the company will save by switching to regular cane sugar. Note that you will need to include the annual procurement costs in your calculations.
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