Eva recently had a baby. On average, Eva needs 10 diapers each day with a standard deviation of 1.3. Eva orders diapers from the company called 8thGeneration. 8thGeneration produces a diaper at a cost of $1 per diaper, and it sells at a price of $2 per diaper to consumers. In addition, it charges $4 shipping fee per shipment regardless of the number of diapers per order. It takes 9 days for each shipment to be delivered from 8thGeneration to Eva. Eva estimates that the aggregate holding cost for diapers, inclusive of the physical holding costs and cost of capital, is 25% per year. Like many parents, Eva does not want to run out of diapers and aims for a 99.9% cycle service level. Assume 1 year = 360 days.

Eva learns that Alex---another new parent living on her street---also uses 8thGeneration without the premium membership. She estimates that Alex has the same needs and holding costs as her. Eva wants to convince Alex to create a joint premium account (splitting the cost of membership equally) and pool their orders together. 

What would be the annual inventory cost savings per parent if Alex accepts Eva's offer? 

Both parents live close enough that you can assume the diaper orders (once pooled) are co-located and meet an aggregate cycle service level of 99.9%.

Answer rating: 100% (QA)

To calculate the annual inventory cost savings per parent if Alex accepts Evas offer we need to compare the costs of ordering diapers individually versus pooling their orders together Lets start by ca... View the full answer