Reference no: EM132143011

One of the few surviving on-line grocers, Fresh Direct uses 150 trucks to generate delivery within 2 hours. Currently Fresh Direct sells $200 million worth of food per year representing 2 million orders and comprising 60 million items. A major part of the operation depends on how well workers in the warehouse assemble orders. An error caught before a shipment leaves the warehouse costs $0.50 per item, while every error found after shipping costs $6.00 per item. After years of effort, Fresh Direct achieved a level of accuracy in assembly so that 99.6% of its items were correctly filled and shipped (that is, only 0.4% items were not shipped correctly). Recently a software firm offered Fresh Direct a RFID product that would check the items in an order after it was assembled and before it left the warehouse and would catch 75% of the incorrect items, thus improving overall order accuracy to 99.9%. What is the maximum that Fresh Direct should be willing to pay to purchase the new system if it wants to recoup the new system costs within a year? A second option that Fresh Direct is examining is implementing a system to lower the cost of shipping an incorrect item by 45% (i.e., to $3.3 per incorrectly shipped item). Would this system provide more value to Fresh Direct than the system described in part 1? How much of a decrease in error cost is needed under the option described in (2) to produce cost savings equivalent to the software product described in (1)?