Reference no: EM13695492

Sturdivant Sound Systems manufactures and sells stereo and CD sound systems in both console and component styles. All parts of the sound systems, with the exception of the speakers, are produced in the Rochester, New York plant. Speakers used in the assembly of Sturdivant's systems are purchased from Morris Electronics of Concord, New Hampshire. Jason Pierce, purchasing agent for Sturdivant Sound Systems, submits a purchase requisition for the speakers once every 20 working days. The company's annual requirements total 5,000 units (20 per working day with 250 working days) and the cost per unit is $60. (Sturdivant does not purchase in greater quantities because Morris Electronics, the supplier, does not offer quantity discounts.) Rarely does a shortage of speakers occur because Morris promises timely delivery following the receipt of a purchase requisition. Total time between date of order and date of receipt is 10 days. Associated with the purchase of each shipment are procurement costs. These costs, which amount to $20 per order, include the costs of preparing the requisition, inspecting and storing the delivered goods, updating inventory records, and issuing a voucher and check for payment. In addition to procurement costs, Sturdivant Sound Systems incurs inventory carrying (or holding) costs, which include insurance, storage, handling, taxes, and the financial opportunity costs of having funds tied up in inventory. These costs equal 10% per unit per year (or $6 per year). Beginning in August of this year, management of Sturdivant Sound Systems will embark on a companywide cost control program in an attempt to improve its profits. One of the areas to be scrutinized closely for possible cost savings is inventory procurement. 1. Introduce the problem. 2. Discuss the current inventory policy and the costs associated with this policy. 3. Discuss the improved procurement policy and the costs associated with this policy. 4. Discuss the production policy and the costs associated with this policy. 5. Give insights, observations, and suggestions based on your analysis. What further opportunities does the firm have if it can reduce order costs? Would this in turn reduce the holding cost percentage?