Reference no: EM133448638

Question

The Friendly Greetings greeting card company outsources printing to a nearby printing shop, which charges a $1200 fixed charge to start producing a design of card, then $0.30 for each card produced. The printing shop turns around production orders quite quickly, so lead-time can be considered negligible.

Demand for birthday cards of a certain classic design has long been at a constant and steady rate of 25, 000 cards per year. Friendly Greetings stores cards in its own warehouse. The company estimates holding costs to be 5 cents per card per year, including variable warehousing costs and the opportunity cost of capital.

1. The company's current ordering policy is not necessarily optimal. They place an order for 15,000 cards when their stock of cards is zero. How much do they spend annually on fixed production charges for the birthday card design?

2. Given their current ordering policy (order 15, 000 cards when inventory is zero), what is their annual holding cost for this particular design?

3. Given their current ordering policy (order 15, 000 cards when inventory is zero), how long (in years) does an individual card spend in the Friendly Greetings warehouse on average?

4. What is the optimal EOQ for the birthday card?

5. Now suppose that the print shop requires a 2-week lead-time to turn around a production order. What is the optimal reorder point for the card? (You may assume 50 weeks in a year.)

6. Suppose again that the print shop requires a 2-week lead-time to turn around a production order. Now suppose that weekly demands for the card are independent and follow the normal distribution with a standard deviation of 60 cards. The average demand rate is unchanged. Now, Friendly Greetings decides to order every 15th day of the month and the order is paid whenever it is placed. The company would like to have a service level of 80%. You may assume 4 weeks in a month and 48 weeks in a year. What is the long run average total inventory?

7. In the previous question, what service level (during lead-time period L) is implied if Friendly Greetings places an order when their inventory of cards hits 1120?

8. Suppose that, if a customer wants a birthday card when Friendly Greetings is stock out, the sale is lost. Friendly Greetings still orders every 15th day of the month. What is the stockout cost implied when the company decides to provide a service level of 80%? Assume Friendly Greetings used an appropriate model from class to determine the optimal service level. You may assume 4 weeks in a month and 48 weeks in a year. There are 12 months in a year.