An electrical goods manufacturer plans to purchase a relay switch, a key component in many of...

 

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An electrical goods manufacturer plans to purchase a relay switch, a key component in many of its products, from an external source. It is estimated that the usage of this part in its production process would be normally distributed with a mean of 60 units/day and a standard deviation of 10 units a day (assume 365 days in a year). The firm's annual inventory carrying cost rate is 20% and the average purchase order cost is $20/order. It intends to employ a continuous review (Q, R) system with a cycle service level of 90%, for generating purchase orders for this item. A 3rd party logistics (3PL) provider is used for shipping all parts and components from suppliers to the single manufacturing facility. This 3PL provider uses a standard size truck (which can hold up to 5,000 of these relay switches) for all shipments. The manufacturer has identified two potential suppliers who qualify as vendors for these relay switches. The following relevant data are available: Supplier 1 Supplier 2 Minimum Order Quantity: 5,000 units None Unit Purchase Cost: $2.90 $3.00 Expected Delivery Lead Time: 12 days 6 days Std. Deviation of Lead Time: 3 days 1 day For either of these potential vendors, the 3PL firm's full truckload (TL) fixed transportation charge would be $2,000 per shipment. For less-than-truckload (LTL) shipments, for which there are no fixed costs, the following load-based variable shipping cost schedule for the item in question applies to both suppliers: Shipment Size 1– 499 units Unit Variable Shipment Cost $0.60 500 – 999 units $0.55 1,000 - 1,999 units $0.50 2,000-4.999 units $0.45 Based on the above data, which vendor should be selected as the supplier of these relay switches? What order quantity and reorder points should be implemented for generating the purchase orders of this item? Compute the associated expected annual total relevant cost for the manufacturer. An electrical goods manufacturer plans to purchase a relay switch, a key component in many of its products, from an external source. It is estimated that the usage of this part in its production process would be normally distributed with a mean of 60 units/day and a standard deviation of 10 units a day (assume 365 days in a year). The firm's annual inventory carrying cost rate is 20% and the average purchase order cost is $20/order. It intends to employ a continuous review (Q, R) system with a cycle service level of 90%, for generating purchase orders for this item. A 3rd party logistics (3PL) provider is used for shipping all parts and components from suppliers to the single manufacturing facility. This 3PL provider uses a standard size truck (which can hold up to 5,000 of these relay switches) for all shipments. The manufacturer has identified two potential suppliers who qualify as vendors for these relay switches. The following relevant data are available: Supplier 1 Supplier 2 Minimum Order Quantity: 5,000 units None Unit Purchase Cost: $2.90 $3.00 Expected Delivery Lead Time: 12 days 6 days Std. Deviation of Lead Time: 3 days 1 day For either of these potential vendors, the 3PL firm's full truckload (TL) fixed transportation charge would be $2,000 per shipment. For less-than-truckload (LTL) shipments, for which there are no fixed costs, the following load-based variable shipping cost schedule for the item in question applies to both suppliers: Shipment Size 1– 499 units Unit Variable Shipment Cost $0.60 500 – 999 units $0.55 1,000 - 1,999 units $0.50 2,000-4.999 units $0.45 Based on the above data, which vendor should be selected as the supplier of these relay switches? What order quantity and reorder points should be implemented for generating the purchase orders of this item? Compute the associated expected annual total relevant cost for the manufacturer.

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Lets first summarize the formulas and then we can use them for the inventory management Annual deman... View the full answer