Company Background Information

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Throx sells higher$-$end custom$-$design socks in three$-$sock sets $($rather than the customary two sets$).$ The company operates from a small packaging and distribution facility in Richmond, CA from which it ships products to customers.$$ Given the company$$s location and focus, $97\%$ of sales are in California, primarily in the major urban areas of the San Francisco Bay area, Los Angeles, Sacramento, and last but not least San Diego. $$The company sells exclusively via online sales, at an average price of $$20/$three$-$sock set, plus shipping costs charged to the customer.$$

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The company currently orders its product from the Chinese sock manufacturer Zhejiang Datang Hosiery Group Co$.,$ Ltd in so$-$called $$Sock City.$$ Socks are transported from the factory via truck to the port of Shanghai, from where they are shipped to the port at LA$-$Long Beach via ocean freight. Once offloaded at the port of LA$-$Long Beach, the socks are then shipped via truck to the Richmond facility.$$ On average, shipping time from the manufacturer to the Richmond facility takes $4$ weeks. $$In addition to the transit time required for shipment, the lead time from when an order is placed with the manufacturer to when it is shipped from Zhejiang is $4$ weeks. So$,$ the total lead time is considered to be $8$ weeks from when Throx places an order until it reaches the Richmond facility.$$ Historically, the standard deviation of total lead time has been $1$ week.

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Product Orders $($Demand$)$ Information

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The company provides you with the following information for the past two fiscal years:

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Demand Characteristic

$2022$

$2023$

Annual Demand, sets

$21,028$

$24,182$

Average Weekly Demand

$404$

$465$

Standard Deviation of weekly Demand

$101$

$116$

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Product Forecasting Information

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Throx uses two main forecasting methods based on annual data to predict orders for the following year, a weighted moving average and exponential smoothing.$$ The table below provides forecast calculations for FY$2020$ through FY$2023,$ along with actual demand experienced in each of those years.$$

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Actual Demand$($Three Sock Sets$)$

Weighted Moving Average Fcst

Exponential Forecast

$2020$

$15,900$

$12,400$

$13,500$

$2021$

$18,285$

$14,100$

$15,420$

$2022$

$21,028$

$17,060$

$17,712$

$2023$

$24,182$

$19\mathrm{.}966$

$20,365$

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Weighted Moving Average uses Wt $=0\mathrm{.}7,$ Wt$-1=0\mathrm{.}2,$ Wt$-2=0\mathrm{.}1$

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Exponential Smoothing uses $=0\mathrm{.}8$ and $1-$ $=0\mathrm{.}2$

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Inventory Management Information

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The initial inventory for all sock styles combined at the beginning of FY$2024$ is $2,250$ units.$$ You also have information on current costs, which includes:

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$$ Order cost to Throx for an order placed with its current supplier, $$/$order $=$ S $=$ $$300$

$$ Holding cost per set per year $=$ H $=$ $$3\mathrm{.}75$

$$ The company currently pays $($P$)$ $$12\mathrm{.}00$ for each set of socks

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The company uses a continuous review replenishment policy and has IT systems in place that allow constant monitoring of key information.$$ Last year, the company used a ROP under this policy of $2,500$ units for all sock styles and an order quantity $($Q$)$ of $6,000$ units for all sock styles.$1)$

$3.$ For this question you will need to calculate $2$ different EOQ and ROP values and interpret the results.$$ For both EOQ and ROP, give your final answer in full sock sets $($ROUND UP to the next whole number$).$ The specific questions to answer are indicated in items a$,$ b$,$ and c below.$$ Additional tips to calculate the EOQ and ROP are provided in the bullet points that follow.

a$)$ Calculate EOQ and ROP for FY$2023$ based on the FY$2023$ forecast value $($not the FY$2024$ forecast$)$ that you determined to be most accurate in Question #$1.$

b$)$ Calculate the EOQ and ROP based upon actual demand for FY$2023$

c$)$ Using the $2023$ actual demand $($D$),$ calculate the total ordering and inventory holding costs based on each of the EOQ$$s you calculated above and the current Q $(6,000)$ that Throx is using.

$$ i$.$ Compare the total ordering and inventory holding costs from the three results and explain what drives the differences$$

d$)$ What are the implications of the ROP Throx is currently using versus the ROP you calculated based on Actual Demand?