Coastal Cabinets produces cabinets for new home builders. You have been called in to settle a dispute between Coastal Cabinets and Executive Homes, a builder of custom homes.
Executive Homes buys 20,000 units of a particular cabinet from Coastal Cabinets every year. It insists that Coastal keep a one-month inventory to accommodate fluctuations in Executive’s demand. Coastal does not want to keep any inventory and says that Executive Homes should buy components in advance and store them.
You determine that the inventory storage costs per unit are $50 at Coastal and $125 at Executive Homes.
How do you suggest the two companies settle their dispute?