XYZ is a company that produces a variety of medical appliances for hospital and home use. It has experienced a steady demand for its products, which are highly regarded in the health care field. Recently the company has undertaken a review of its inventory ordering procedures to reduce costs.
One of XYZ's products is a blood pressure testing kit. It manufactures all of the components for the kit in-house except for the digital display unit. The display units are ordered at six-week intervals from the supplier. This ordering system began about six year ago, because the supplier insisted on it. However, that supplier was bought out by another supplier about a year ago, and the six-week ordering requirement is no longer in place. Nonetheless, XYZ has continued to use the six-week ordering policy. According to purchasing manager Jeremy Chandler, "Unless somebody can give me a reason for changing, I'm going to stick with what we've been doing. I don't have time to reinvent the wheel."
Further discussions with Jeremy revealed a cost of $30 to order and receive a shipment of display units from the supplier. The company assembles 90 kits a week. Also information from Tyson Lin, in accounting, indicated a weekly carrying cost of $.1 for each display unit.
The supplier has been quite reliable with deliveries; order lead time is six days. Jeremy indicated that as far as he was concerned, lead-time variability is virtually nonexistent.
(a) Would using an order interval other than every six weeks reduce costs? If so, what order interval would be best, and what order size would that involve?
(b) Would you recommend changing to the optimal order interval? Explain.