Reference no: EM132910441

Operation management

DBS is a manufacturer of hi-tech digital devices in Melbourne. It uses a special integrated circuit component to make its devices. DBS requires an average of 42,000 units of this special component every year in its manufacturing process. The major supplier of the special component that DBS has been dealing with, is a preferred supply chain partner who charges a price per unit of $4500 for the component. Each order costs $850 to process. Because of limited storage space, the operations manager wants to factor in inventory holding cost at 17.25% of the unit cost. You have been asked to:

(1) Determine the economic order quantity (EOQ) and total annual cost if ordering the EOQ number of units. How much will DBS be able to save by adopting the EOQ versus a current Q = 400? What is the reorder point with safety stock if lead time is 28 days, standard deviation of weekly demand is 2.85 and on an average DBS operates for a total of 42 whole weeks every year and a whole week consists of seven days? Assume a z value of 1.645 correspondings to the desired service level as specified in DBS' operating procedures. What would the reorder point be without safety stock and how would you interpret each of the two reorder points?

(2) Environmental considerations, material losses and waste disposal can be included in the EOQ model to improve inventory management practices. Assume that on an average 10.5% of the components that DBS purchases are damaged in transit thus becoming unusable and have to be disposed of. Disposal cost is $320 per unit. Find the new EOQ and total annual cost when the disposal cost is considered. What implications does this have for the sustainability of DBS' inventory practices?

(3) Explain the implications to the operations manager if estimates of setup (order) costs include fixed, semi-variable, and pure variable costs while inventory-holding costs include only pure variable costs.

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