Question (quantity discounts): A company faces an annual demand for 10,000 footballs.

The holding cost are 10 per football & year, & the cost of placing one order are $80. (a) Determine the optimal order quantity. How many orders should be placed at optimum & what is the cycle time (given 360 working days per year)? What are the total inventory cost? What is the reorder point, given a lead time of 160 days? (b) The present company policy is to place orders on a quarterly basis. What are the costs of this policy and what are the percentage savings if the optimal policy as determined above would be adopted? (c) Suppose now that we are now allowed to include planned shortages. It has been estimated that the cost of being one unit short for one year is 50. Compute the optimal order quantity, the optimal planned shortage, & the total cost with this policy. Compare the result to the costs computed under (a) & explain the difference in one sentence. (d) Suppose now that the companys supplier offers discounts, provided that the company orders larger quantities. Without the discount (the situation under (a)), the price of one unit of the product is $2, and the holding costs are 5% of the price. The supplier offers a % discount in case the company orders at least 6,000 units. As an alternative, the supplier also offers a 1% discount, if the company orders at least 15,000 units. Consider all alternatives, compute the total costs in each case & make your recommendation.

Solution: D = 10,000, C h =0.1, C o = 80. (a) Q* =

(2)(10,000)(80) = 4,000, N* = 10,000/4,000 = 2.5, t c = 360/2.5 = 144 [days]. .10

TC(Q*) =

(2)(10,000)(80)(.10) = $400.

R = (10,000/360) (160)

(4,000) = 4,444.44 4,000 = 444.44. 160 144

(b) Present policy: N = 4, so that Q = 2,500 & TC(2,500) = 320 + 125 = 445; savings are 45/445 = 10.11%. (c) Q* = 4,381.78 & S* = 730.30, so that TC* = 182.57 + 152.14 + 30.43 = 365.14. It is cheaper than the solution under (a) as we have the option to be short a few units; however, shortage costs (as compared to holding costs) are high, so that shortages are comparatively low. (d) Without discount, we have the same situation as under (a), this time with p = 2 & C h = 5% of p = .1. Then Q* = 4,000 & TC* = 20,400. With the % discount, we have p = 1.99 & pC h = .0995, so that we obtain Q* = 4,010.038 Q = 6,000. Then TC(6,000) = 133.33 + 298.50 + 19,900 = 20,331.83. With the 1% discount, we have p = 1.98 & pC h = .099, so that we obtain Q* = 4,020.15 Q = 15,000. Then TC(15,000) = 53.33 + 742.50 + 19,800 = 20,595.83. Comparing the three options, we should order 6,000 footballs & get a % discount for a total cost of $20,331.83.