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Question 6. You are making the inventory decisions for an international company. The product has a forecasted daily demand with mean 365 and standard deviation 36. You have two different options for procuring each product: from your factory in China (out- sourcing) or procuring from your own factory in the United states (in-house). The following table provides the relevant data for each type of procuring. Setup cost Lead time Procurement cost (per unit) Outsourcing $4,500 64 days $4.5 In-house $50 4 days $5 The desired service level (irrespective of the procurement decision) is 97.5% and the cost of capital of the firm is 20% (that is, the firm faces an annual interest rate of 20%). You may assume 365 days in a year. a) If we decide to produce in-house using an (ROP,Q) system. 1. (2 points) What is the optimal ordering quantity? 2x365x365x50 = 3650 tunits Q= 2. (2 points) What is reorder point? ROP=365 x 4 + 2 x 74 x 36 = 1460 + 144 = 1604 units 3. (2 points) What is the average inventory level? 3650/2+144 - 1969 units 4. (2 points) What is the inventory turn? 365*365/1969 =67.66 5. (2 points) What is the annual holding cost? 1969'1 $1969 6. (2 points) What is the annual setup cost? 365*365/3650 * 50 = $1,825 7. (2 points) What is the annual total cost (including the purchase cost)? 1969-1825+365*365*5=$669,919 Wwe decide to sourcing an (ADP,Q) wystem. 1 points) What is the optimal ordering quantity? 23653654500 0 - 0.9 36500 units 2 points) What is reorder point? ROP36564264362361576-23,936 units 1. pinta) What is the average inventory level? 36500/2-876 - 1822 is 4. points) What is the inventory tum? 365 365/108267.08 5. 02 points What is the annual holding cost? 18826*0,9 = 516943.4 6. (2 points What is the annual setup.com? 365*365/36500* 4500 = $16425 7. polnts) What is the annual total cost including the purchase cont? 16943.4+16425+365*365*4,525632,880.9 We now need to decide on our optimal procurement strategy. That is, we need to decide whether to produce each product in-house or to outsource in order to minimize total cost 1 14 points Draw a decision tree that corresponds to your decision problem out 632880.9 669919 2. points What is your optimal procurement strategy? Outsourcing d) (4 points suppose that were that the Mandard deviation of the demand uncertainty is much les tun what we have originally estimated. Will you change your procurement strategy Explain your we The safety stock level is proportional to the standard deviation and touring strategy has a much higher safety stock level compared to the in-house trategy (4:1) As a reven outsourcing strategy has low procurement cost and lower per unit holding.co) (0911), the reduced demand standard deviation would help outsourcing straty more and we should continue outsourde in general, in-house production reserved for high uncertainty item