You are hired by Southwest Glass Manufacturing (SGM) to optimize their ordering decisions of one of their
Question:
You are hired by Southwest Glass Manufacturing (SGM) to optimize their ordering decisions of one of their important raw inputs – Imported Soda Ash. SGM imports natural Soda Ash from Turkey in special containers and uses a dedicated silo facility in the Port of Los Angeles, CA. SGM production facilities in Salton City, CA have continuous production (24 hours/day, 7 days/week) utilized steadily at 90% capacity, requiring 10,000 metric tons of Soda Ash each year. A metric ton of Soda Ash costs $300. The order cost is $10,000. The order lead time is 6 months. The annual holding cost of inventory is 15% of the item cost.
- (4 pts.) Determine the optimal order quantity and the optimal total of expected annual inventory holding and setup costs.
- (6 pts.) Suppose that the supplier offers a discount such that the purchasing price for all items drops to $295/metric ton if SGM purchases at least 3000 metric tons in an order. An analyst has calculated total annual inventory and setup cost using Q=3000 units as follows:
The analyst concludes that the company should not order 3000 units at a time.
Although the analyst is consistent in his calculation and his conclusion, is the analyst correct in his conclusion? Why or why not?