Question

An online retailer of small gifts orders products from a number of suppliers, stores them, packs them to customers’ orders, and then dispatches them using a distribution company. Although broadly successful, the business is very keen to reduce its operating costs. A number of suggestions have been made to do this. There are as follows:

 Quality: Make each packer responsible for his or her own quality. This could potentially reduce the percentage of mis-packed items from 0.5% to near zero. Repacking an item that has been mis-packed costs RM1 per item.

 Speed: Negotiate with suppliers to ensure that they respond to delivery requests faster. It is estimated that this would cut the value of inventories held by the retailer by RM200,000.

 Dependability: Institute a simple control system that would give early warning if the total number of orders that should be dispatched by the end of the day actually is dispatched in time. Currently 2% of orders is not packed by the end of the day and therefore has to be sent by express courier the following day. This costs an extra RM1 per item.

If the online retailer dispatches two million items every year and if the cost of holding inventory is 9% of its value, how much cost will each suggestion save the company? State the total savings

Answer 1

the online retailer dispatches 2000000 items every year

Quality: This could potentially reduce the percentage of mis-packed items from 0.5% to near zero. Repacking an item that has been mis-packed costs RM1 per item.

hence savings = total dispatch per year * (earlier mis-packed item rate - new mis-packed item rate) * cost of repacking per unit

= 2000000 * (0.5% - 0%) * 1

= RM10000

Speed: cost of holding inventory is 9% of its value. estimated cut in the value of inventories = RM200,000

therefore savings =  estimated cut in the value of inventories * cost of holding inventory as a percentage of inventory value

= 200000 * 9%

= RM18000

Dependability: it would give early warning if the total number of orders that should be dispatched by the end of the day actually is dispatched in time. 2% of orders is not packed by the end of the day and therefore has to be sent by express courier the following day. This costs an extra RM1 per item.

savings = total dispatch per year * percent dispatch by express courier * extra cost of this dispatch of per item

= 2000000 * 2% * 1

= RM40000

Total savings = sum of savings from each alternative = 10000 + 18000 + 40000

= RM68000