Question

MCParts, an MRO (maintenance, repair, and operations) distributor, sources three of its products from three different suppliers in the Atlanta region. These three products serve the same basic function but have varying features, and hence different demand profiles. Demand for the fastest selling product (product 1) is 24,000 units a year, demand for the medium selling product (product 2) is 9,000 units per year, and demand for the slowest moving product (product 3) is 3,000 units per year. Product 1 costs $200 to MCParts to purchase, with a holding cost of 25%; product 2 costs $220 to purchase, with a holding cost of 30%; product 3 costs $250 to purchase, with a holding cost of 40%. Each shipment costs $500 for the truck plus $250 per pickup due to processing and handling. Each truck has a capacity of 1500 of these products.

Currently, MCParts uses full truckload (FTL) transportation to source separately from each supplier, but they are considering two alternatives to reduce inventory costs: i. use optimal lot sizes for each product instead of full truckload shipments,

ii. aggregate sourcing on a single truck, via supplier runs.

A. What is the annual transportation and holding cost of sourcing a full truckload from each supplier in each order?

B. What is the optimal order quantity of each product, sourced separately from each supplier? What is the annual transportation and holding cost of this policy? Comment on why this policy saves from inventory costs when compared to full truckload policy in part (A).

C. What is the optimal order quantity for each product if MCParts aggregates shipments from the three suppliers on every truck that arrives from Atlanta? What is the annual transportation and holding cost of this policy? Comment on why this policy saves from inventory costs when compared to separate shipments policy in part (B).

D. Using the steps described in slides, develop a tailored aggregation policy that does not necessarily pickup all products in every supplier run. Describe the tailored policy and calculate its annual transportation and holding cost. Comment on why this policy was not as effective as the complete aggregation approach in part (C).

Answer 1

A.

Supplier	Product	Demand units/year	Per unit cost , $	Holding Cost , %	FTL (Full truck load)CAP	Cost of FTL	Holding cost for FTL	No. of orders for each 1500 FTL	Annual Transportation cost	Holding Cost
1	High Selling	24000	200	25	1500	300000	75000	24000/1500	16	16*1500*200	4800000	75000*16	1200000
2	Medium Selling	9000	220	30	1500	330000	99000	9000/1500	6	6*1500*220	1980000	99000*6	594000
3	Slow Moving	3000	250	40	1500	375000	150000	3000/1500	2	2*1500*250	750000	150000*2	300000

Annual Transportation cost for Supplier 1 is 480000$ and Holding cost is 1200000$

Annual Transportation cost for Supplier 2 is1980000$ and Holding cost is 594000 $

Annual Transportation cost for Supplier 3 is750000$ and Holding cost is 750000 $

B. Optimal Order quantity =√2DS/H

D=Annual demand in units

S = set up cost

H= Holding cost /unit

Since S=1 ,

For Supplier 1 ,Optimal order qty =√2 x 24000 x1/200 =√240 =15.49 ~15 orders

For Supplier 2 ,Optimal order qty =√2 x 9000 x1/220 =√81.81 = 9 orders

For Supplier 3 ,Optimal order qty =√2 x 3000 x1/250 =√24 =4.8 ~ 5orders

Supplier	Product	no. of orders	Annual Transportation cost	Holding Cost
1	High Selling	15	24000/15=1600 units/order	4800000	4800000*0.25	1200000
2	Medium Selling	9	9000/9=1000units / order	1980000	1980000*0.30	594000
3	Slow Moving	5	3000/5=600 units /order	750000	750000*0.40	300000

Annual Transportation cost and Holding cost are same as in FULL TRUCK LOAD OF PART (A) and more units of product 2 and 3 can be shipped.

.Therefore, it can be concluded that Option of choosing OPTIMAL Qauntity over Fullload shipment should be considered.