Question

CTC is an on-line retailer of prescription drugs and health supplements. Vitamin-C represents a significant percentage of its sales. Demand for Vitamin-C is 12000 bottles per year. CTC incurs a fixed order placement, transportation, and receiving cost of $150 each time an order for Vitamin-C is placed with the manufacturer. CTC incurs a holding cost of 25 percent. The price charged by the manufacturer is $4/bottle. Each time CTC places an order, the manufacturer has to process, pack, and ship the order. The manufacturer has a line packing bottles at a steady rate and does not keep any inventory. The fixed cost of filling each order is $350 for manufacturer.

1. Under the non-collaborative environment, the above supply chain uses CTC’s EOQ policy. Please evaluate CTC’s annual ordering and holding costs and Manufacturer’s annual ordering cost and holding cost under the CTC’s EOQ policy. What is the total annual ordering and holding cost for this supply chain under this non-collaborative policy?

Answer 1

Demand for Vitamin C (D) = 12000

Holding Cost (H) = 25%*$4 = $1 per bottle

Ordering cost for CTC (S1) = $150

Ordering fixed cost for manufacturer (S2) = $350

EOQ of CTC = sqrt(2*D*S1/H)

                       = sqrt(2*12000*150/1)

                       = 1897.366

Hence EOQ = 1898 (rounding off to the next whole number)

Therefore under EOQ policy of CTC,

CTC’s annual ordering cost = (D/EOQ)*S1

                                            = $(12000/1898)*150

                                           = $948.37

CTC's annual holding cost = Average inventory * holding cost per unit

                                          = (EOQ/2)*H

                                          =$(1898/2)*1

                                         = $949

Manufacturer's annual ordering cost = (D/EOQ)*S2

                                                          = $(12000/1898)*350

                                                          = $2212.86

The manufacturer does not keep any inventory.

For the total supply chain,

Total cost = Total order cost + Total holding cost

                = Manufacturer total cost + CTC total cost

               = Manufacturer order cost + CTC order cost + CTC holding cost

              = $(2212.80 + 948.37 + 949)

              = $4110.17