Question

Economic order quantity, effect of parameter changes (continuation of 20-16). Athletic Textiles (AT) manufactures the Galaxy jerseys that Fan Base (FB) sells to its customers. AT has recently installed computer software that enables its customers to conduct “one-stop” purchasing using state-of-the-art Web site technology. FB’s ordering cost per purchase order will be $30 using this new technology.

1. Calculate the EOQ for the Galaxy jerseys using the revised ordering cost of $30 per purchase order Assume all other data from Exercise 20-16 are the same. Comment on the result

2. Suppose AT proposes to “assist” FB. AT will allow EB customers to order directly from the AT Web site. AT would ship directly to these customers. AT would pay $10 to FB for every Galaxy jersey purchased by one of FB’s customers. Comment qualitatively on how this offer would affect inventory management at FB. What factors should FB consider in deciding whether to accept AT’s proposal?

Answer 1

Economic order quantity, effect of parameter changes (continuation of 20-16). 

1. 

D = 10,000, P = 

 

The sizable reduction $30, C = $7

in ordering cost (from $200 to $30 per purchase order) has reduced the EOQ from 756 to 293.

                  

2.        

The AT proposal has both upsides and downsides. The upside is potentially higher sales. FB customers may purchase more online than if they have to physically visit a store. FB would also have lower administrative costs and lower inventory holding costs with the proposal.

 

The downside is that AT could capture FB’s customers. Repeat customers to the AT web site need not be classified as FB customers. FB would have to establish enforceable rules to make sure it captures ongoing revenues from determine whether FB should accept AT’s proposal. Much depends on whether FB views AT as a credible, “honest” partner customers it directs to the AP web site.

 

There is insufficient information to.

The sizable reduction $30, C = $7

in ordering cost (from $200 to $30 per purchase order) has reduced the EOQ from 756 to 293.