Question

Wonder Line(WL​) operates a megastore featuring sports merchandise. It uses an EOQ decision model to make inventory decisions. It is now considering inventory decisions for its Los Angeles Galaxy soccer jerseys product line. This is a highly popular item. Data for 2017are as​ follows:

Expected annual demand for Galaxy jerseys	9,000
Ordering cost per purchase order	$250
Carrying cost per year	$8	Per jersey

Each jersey costs WL$50and sells for $100.

The $8 carrying cost per jersey per year consists of the required return on investment of $5.00 (10​% x $50purchase​ price) plus $3.00 in relevant​insurance, handling, and storage costs. The purchasing lead time is 55 days. WLis open 365 days a year.

WL has computed the following information using the EOQ decision​ model:

EOQ	750 jerseys
Number of orders that will be placed	12 orders per year
Reorder point	123 jerseys

Sportsman Textiles (ST​) manufactures the Galaxy jerseys that Wonder Line(WL​) sells to its customers. SThas recently installed computer software that enables its customers to conduct​ "one-stop" purchasing using​ sate-of-the-art Web site technology. WL​'s ordering cost per purchase order will be $40using this new technology.

Requirements

1.	Calculate the EOQ for the Galaxy jerseys using the revised ordering cost of $40 per purchase order. Comment on the result.
2.	Suppose ST proposes to​ "assist" WL. ST will allow WL customers to order directly from the ST Web site. ST would ship directly to these customers. ST would pay $12 to WL for every Galaxy jersey purchased by one of WL​'s customers. Comment qualitatively on how this offer would affect inventory management at WL. What factors should WL consider in deciding whether to accept ST​'s proposal?

Answer 1

Requirement 1

Given,

Annual requirement (D) = 9000 jerseys

Purchase order cost (P) = $ 40

Carrying cost = $ 8

. = = 300 jerseys

The sizable reduction in ordering cost (from $250 to $40 per purchase order) has reduced the EOQ from 750 to 300.

Requirement 2

The proposal from ST has both advantages and disadvantages. The pro is higher sales, WL customers would purchase from online stores than visiting physically the store. This will reduce WL’s administrative costs and can hold lower inventories as more sale occurs through online. This results in lower inventory carrying costs.

The cons is that ST will slowly take over WL’s customers. The repeat customers to the online store won’t be classified as WL customers. WL has to establish enforceable rules to make sure it contains ongoing revenues that it directs to website.

Furthermore, there is not enough data to determine if WL should accept ST’s proposal. How WL views ST as honest, credible or not would determine the engagement.