What is the ordering cost

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Reference no: EM132730458

CarCity is a big retailer for car parts and accessories. The store stocks different types and sizes of car tire. One of the best selling tires is the Tiger Model R125, which is currently purchased from a factory in Indonesia. An analysis of the purchasing operation shows that approximately 2 labor hours are required to process a purchase order, regardless of the quantity purchased. Salaries in the purchasing Department average OMR 15 per hour, including employee benefits. In addition, a detailed analysis of 20 previous purchase orders showed that OMR XXX was spent on telephone, paper, and other consumables directly related to the ordering process (see guidelines above to obtain value of XXX). Shipping cost from Indonesia is OMR 250 for a container. A container has a capacity of 800 tires. The lead time for shipments from Indonesia is 15 days. Finally, CarCity's financial analysts established a holding cost of 30% for this type of tire.

The annual demand for the R125 tire is constant at a rate of 8400 units. The store purchases the tires from the Indonesian factory at a cost of 12 OMR per unit. The current practice at CarCity is to place one re-stock order each month. The store operates 350 days per year.

Part A

1. What is the ordering cost?

2. What is the current annual total inventory cost under the company's current policy?

3. Determine the optimal order quantity.

4. How much safety stock is recommended for the company to carry? Justify your answer.

5. What reorder point should be used?

6. State the optimal inventory policy.

7. What is the total annual inventory cost under the optimal inventory policy, and how much savings does the Company achieve by implementing the optimal policy?

8. The store management has decided to allow back orders. What would be the optimal inventory policy if back ordering is acceptable, and how much would CarCity save in total cost? Backordering costs are 45%.

9. CarCity is considering moving their business to a different supplier in Indonesia. This new supplier offers the following pricing schedule for the tires.

Quantity	Price per unit (OMR)
0- 100	12.25
101 - 200	12.00
201 - 500	11.75
More than 501	11.50

Should CarCity switch to the new supplier? Justify your answer.

Part B- Make or Buy?

The local business, named A 1 Rubber, can produce the tires at the rate of 75 tires per day. The production costs are expected to be OMR 14.5 per tire. The setup for a production run requires five hours, with a cost for labor and lost production time of OMR 75 per hour. Each day's production is delivered immediately to CarCity.

10. What is the optimal order quantity if CarCity chooses to purchase the tires from At Rubber?

11. How much storage capacity should CarCity prepare (in number of tires)?

12. How many production runs will Al Rubber carryout for CarCity each year?

13. What is the duration of each production run?

14. Should CarCity switch its business to Al Rubber? Justify your answer. Part C- Uncertain Demand
After one year of operations, CarCity realized that daily demand for the tires was not constant, and some variability existed. The Excel file `CarCityDemand.xls', contains the actual demand from the past year. Assume that CarCity has decided for some reasons to continue procuring the 8125 tires from Indonesia, and that the lead time remains constant at 15 days.

15. Assuming that the demand data sample (CarCityDemand.xls) in your possession is large enough, determine whether the demand follows a normal distribution or not.

16. CarCity has specified a Type 1 service level of 95%. Accordingly, what size of safety stock should be kept in order to achieve this service level?

17. Determine the total annual inventory cost under this 95% Type 1 service level inventory policy.

18. In a first assessment of the new policy, the company managers concluded that the type I service level is not enough information encompassing. What is meant by this?

19. Calculate the fill rate for CarCity's reorder and safety stock levels?

20. What is the expected number of tires short per cycle?

21. The CarCity store management is thinking about switching to a periodic review system where the stock-on-hand is reviewed at 12 noon every Friday. Analyze the prospective inventory system and help CarCity decide whether or not to shift to a periodic review system. CarCity wants to maintain its 95% Type 1 service level regardless of which system (periodic or review) is adopted.

Reference no: EM132730458

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