Question

Complete Computer (CC) is a retailer of computer equipment in Minneapolis with four retail outlets. Currently each outlet manages its ordering independently. Demand at each retail outlet averages 4,043 units per week. Each unit costs $200 and CC has a holding cost of 20%. The fixed cost of each order (administrative + transportation) is $902. Assume 50 weeks in a year.

a) Given that each outlet orders independently and gets its own delivery, what the optimal order size at each outlet?

b) CC is thinking of centralizing purchasing (for all four outlets). In this setting, CC will place a single order (for all outlets) with the supplier. The supplier will deliver the order on a common truck to a transit point. Since individual requirements are identical across outlets, the total order is split equally and shipped to the retailers from this transit point. This entire operation has increased the fixed cost of placing an order to $1,797. If CC manages ordering optimally in the new setting, what would be the new average inventory in the CC system (across all four outlets)?

Answer 1

a) Demand at each outlet = d = 4043 units per week

No. of weeks in a year = N = 50 weeks

Annual Demand at each outlet = D = 4043 * 50 = 202,150 nos.

Cost of each unit = P = $200

Holding cost = H = 20% = 20% * 200 = $40

Fixed cost = S = $902

a) Individual Optimal ordering quantity for individual Outlet= EOQi = = = 3019.43 units

Optimal Order Quantity at each outlet = 3019.43 units

b) In case of central purchasing, additional fixed cost = $1797

Hence, total fixed cost = St = S + 1797 = 902 + 1797 = $2699

Demand at 4 outlets = Dt = Demand at each outlet * 4 = 202,150 * 4 = 808,600 units

Hence, New order quantity = EOQt = = = 10,446.08

New Average inventory = EOQt / 2 = 10446.08 / 2 = 5223.04 units

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