In: Operations Management
Question: In January 2009, Tom Sosa, the purchasing manager, received a telephone call from their Columbus,...
In January 2009, Tom Sosa, the purchasing manager, received a telephone call from their Columbus, Indiana, diesel engine supplier informing him that effective June they were no longer producing the D-342 diesel engines at the Columbus plant. The D-342 engine sales were decreasing and would no longer be in their product line. Tom was in shock. He was now forced to deal with the sole supplier of the D-342 located in Portland, Oregon. The most recent price schedule submitted by the Oregon engine supplier is given below:
Units per Order | Unit Price |
Less than or equal to 100 | $ 4,800 |
Between 100 and 200 | 4,700 |
Greater than 200 | 4,550 |
The prices had been basically the same as the Columbus supplier except that they are F.O.B. Portland. The traffic department informed Tom that the transportation cost per hundredweight is $10 for carload lots of 50,000 pounds. The less than carload rate is $15 per hundredweight. The replenishment cycle normally takes one week.
BACKGROUND
Tom Sosa, the supply manager for MARS, Inc. was contemplating several significant changes in the D-342 diesel engine market. Mr. Sosa was concerned because in its production of the 98-D loader, MARS used 10 diesel engines each working day of the month. (MARS operated on a 20-day-per-month schedule.) Each engine weighs 500 pounds. Engine orders are currently placed every Monday morning. For the past 10 years, the D-342 engines had been produced in only two locations in the United States, one in Columbus, Indiana, and the other in Portland, Oregon. Mr. Sosa felt fortunate that the Columbus producer was located approximately 30 miles from his facility. The Columbus supplier offered just-in-time delivery service at no charge to MARS.
MARS implemented lean manufacturing in 2002. The kanban-controlled JIT production system was implemented based on the premise of minimizing work-in-process inventories (waste) by reducing lot sizes in order to increase production efficiency and product quality.
ACTION TAKEN BY TOM
Mr. Sosa compiled cost and warehouse capacity data on the D-342 engine from the accounting department. See Table C17.1.
Mr. Sosa wonders what effects these new developments will have on his cost structure.
Assignment Questions
TABLE C17.1
Cost and Warehouse Capacity
Cost of unloading engines into warehouse | $0.25 (per 100/wt) |
Order processing cost per requisition | $100 |
Warehouse capacity | 200 units |
Outside warehouse costs | $39 per year per unit* |
Expediting cost per requisition | $50 |
Inventory carrying cost | 38% |
All unit discount is is applied to all the units but incremental discount is applied to the additional units beyond the breakpoint.supplier always provide a certain range of order with discount in order to sell his product in large volume, but for purchaser alert of that discount , he should be also considering the cost of stocking extra units required that is called holding or carrying cost.
Now as per the discounts , calculate the total cost EOQ
EOQ=SQRT((2*2400*100)/.38*C), where C is the unit price given of range of discount.
so for 4800 unit price EOQ=SQRT((2*2400*100)/.38*4800)=16.22 Units
for 4700 EOQ=16.39
for 4500 EOQ=16.75
Total cost and EOQ are differ as EOQ is the optimal order quantity and total cost is the total cost of ordering.Total cost can only be calculated by knowing the Optimum quantity order.
the formula is as follows
TC=P*D+H(EOQ)/2+SD/(EOQ)
EOQ is preferably taken as its the optimum quantity of order and will cost you as per needed.