Reference no: EM133616940

Question: You have been hired as a consultant by the Ontario Provincial Government to help identify "efficiencies".  One potential area of cost reduction is to centralize the procurement of basic supplies across multiple school boards.  Prior to conducting a detailed investigation of cost savings you have been asked to prepare a report to illustrate potential benefits by focusing on a single commodity.

One basic commodity that is procured by the individual boards is copy paper.  This is a high use item and the usage and procurement details for each board are as follows (assume that the school year is 12 months and usage is relatively constant).  The unit price of a box of paper is $60 and the annual holding cost for a box is $2.

	Monthly usage	Cost of placing an order (estimated fixed cost)	Current Order size
School Board A	500 boxes	$1000	1500 boxes
School Board B	200 boxes	$800	400 boxes
School Board C	300 boxes	$900	300 boxes
School Board D	400 boxes	$1000	1600 boxes
School Board E	600 boxes	$1200	900 boxes
School Board F	100 boxes	$400	300 boxes
School Board G	200 boxes	$1000	200 boxes

 Detailing your analysis and procurement recommendations.  You will want to calculate the current state total purchasing costs using the given order quantities and compare them to the total purchasing costs leaving the decentralized order process in place but applying economic order quantities for each school board and to the total purchasing costs after establishing a centralized order process utilized an economic order quantity for this process as well.  Clearly state all assumptions.  If it was known that the lead time was 1 week, would this change your conclusion (consider fixed cost and order process)?

Within the centralized option, assume that lead time is actually 1 week and suppose that lead time demand follows a normal distribution and the standard deviation of lead time demand is 50 boxes.  As copy paper is a critical commodity and centralizing this commodity does pose some supply risk, in making your recommendation to management, you are proposing to put some safety inventory in place to ensure that a service level of 95% order fulfillment to the schools is achieved.  How does this impact your reorder point?  Please explain in detail showing your calculations.