A medium-sized furniture factory receives around 30,000 orders per year with, on average, $5,000 net profit per order. 65% of its incomplete orders are back-ordered. Back order cost per order contains $20 administrative fee, $80 re-handling, $120 delivery and $400 price reduction to keep the customer happy! However, 35% of the incomplete orders are cancelled. 

(i) The current fill rate is 70%. The new logistic manager decided to improve the fill rate to 85% that requires an additional $6,000,000 warehousing and inventory costs a year. Is it a good decision? 

(ii) Assume that the manager has improved the fill rate to 85%. Now, she considers to improve it to 95% with an additional estimated annual cost of $8,530,000. Do you recommend her to do so?

Answer rating: 100% (QA)

Note At 95 Fill rate estimated additional expenses of 8530000 is assumed as cumulative additional ... View the full answer