Question

Suppose we have two ways to source a product. One way is from the local supplier, while a second way is from a distant supplier.

The terms and parameters for each source are as given in following table:

	Local supplier	Distant supplier
Cost per unit, c	$1.15	$1.00
Lead time (no uncertainty), L	3 weeks	12 weeks
Transportation cost per unit, ct	$0.10	$0.12

Suppose demand for the component is μ=500/week; σ=100/week. (Assume normally distributed demand)

Suppose we have a holding cost of h=$0.01/week. This applies to all inventory in the system.

1. Compute the total landed cost per unit (equal to the procurement cost plus transportation cost plus holding cost for pipeline stock) for each source.

2. Suppose we source from a single supplier, and suppose we assume a periodic review policy with r = 1 week; suppose we have a shortage cost π = 0.30/unit.

What is the base stock for each option that minimizes the expected costs?

3. Suppose we follow the base stock policy calculated in Question 2.

What is the expected total cost per week for each option?

The expected total cost is the sum of the procurement cost, the transportation cost, the inventory holding cost for the pipeline inventory plus the cycle stock and safety stock, and the shortage cost.

4. Suppose we implement a dual sourcing strategy, and we place a standing order with the distant supplier for 350 units per week.

Suppose it is Jan. 7, 2019, which is a review epoch at which we place an order to the local supplier. The prior orders from both the local and distant supplier have been received and the inventory on hand is 1000 units.

There are two orders in process with the local suppler: an order for 75 units to be delivered on Jan. 14, and on order for 100 units to be delivered on Jan. 21. In addition, under the terms of the standing order, the distant supplier will deliver 350 units on Jan. 14, Jan. 21, Jan. 28, etc.

Suppose the base stock level for the local supplier is 2370.

How much is the local supplier order on Jan. 7 for delivery on Jan. 28?

Answer 1

1.Computation of total landed cost per unit.

Purticulers	Local Supplier	Distant Supplier
A.Procurement cost per unit	$1.15	$1.00
B.Transportation cost per unit	$0.10	$0.12
C.Holding cost per unit	$0.01	$0.01
Landed cost per unit (A+B+C)	$1.26	$1.13

2.Calculation of base stock for each option.

Purticulers	Local Supplier	Local Supplier	Distant Supplier	Distant Supplier
A.Demand	500units per week	100units per week	500 units per week	100units per week
B.Lead Time	3 Weeks	3 Weeks	12 Weeks	12 Weeks
C.Base stock Level (A*B)	1500 Units	300 units	6000 Units	1200 Units

3.expected total cost per week for 500 units local supplier.

Purticulers	units	cost per unit	Total
A.Procurement cost	500	$1.15	$575
B.Transportation cost per unit	500	$0.10	$50
C.Holding cost per unit	1500	$0.01	$15
D.Expected total cost per week			$640

expected total cost per week for 500 units for Distace supplier.

Purticulers	units	cost per unit	Total
A.Procurement cost	500	$1.00	$500
B.Transportation cost per unit	500	$0.12	$60
C.Holding cost per unit	6000	$0.01	$60
D.Expected total cost per week			$620