Reference no: EM132573742

You are running the inbound transportation for Waterville Valley Chairs (WVC), a manufacturer of custom wooden chairs. You have several dozen vendors that provide you a range of materials to include wood, paint, fabrics, cushions, etc. One of the vendors, Loon Hardware, provides you metal components, fittings, and screws. You are trying to determine how to arrange for the transportation from their distribution center to your plant center.

• Loon Hardware will deliver as many pallets of product as you wish with 2 weeks of lead time with essentially no variability. Loon already has this material ready to ship so that the whole 2 weeks of lead time is loading and transit. Under this contract, you take ownership of the product only when Loon delivers it to your plant. You do not own or incur any inventory costs on this item until it arrives at your dock under this option. They are charging you $500 per pallet.

• You think this is too high and you are exploring options for taking over the management of the transportation. In the United States, this is called converting from "pre-paid" (where the supplier pays for and manages the transportation) to "collect" (where the buyer pays for and manages the transportation). This analysis, then is often called a "Pre-paid to Collect Conversion," but we know that it is just a different word for mode selection.

• WVC uses a continuous review inventory policy and Q has been set to 6 pallets. You always order in full pallet quantities. Demand for the product is Normally distributed with an average of 1.5 pallets per week and a weekly standard deviation of 0.25 pallets. The value of a pallet of product from Loon Hardware is $1750 and you use a 15% holding charge. You have set a CSL of 99% and you use a 48 week year for planning purposes.

• Your company's policy is to NOT include the cost of transportation in product costs when calculating inventory costs. That is, regardless of what you pay for transportation per pallet, the value per pallet, c, is $1750. Do not include transport costs as part of this value, c, when calculating inventory costs.

Please enter all your numerical answers with 4 significant figures.

NOTE: Answer the following questions assuming that Loon Hardware handles all of the transportation.

Question 1: What is your reorder point, s, for an (s,Q) system? Enter an integer value of pallets and round your answer UP to the nearest integer.

Question 2: Using the reorder point, s, as given in the solution above, what is your expected cost of safety stock? Enter an integer value of dollars and round your answer UP to the nearest integer.

Question 3: What is your expected cost of pipeline inventory? Enter an integer value of dollars and round your answer UP to the nearest integer.

Question 4: What is your expected annual transportation cost that Loon will charge you? Enter an integer value of dollars and round your answer UP to the nearest integer. Remember, to use a 48 week year for planning purposes.