Abilene Auto Parts, retailer of general maintenance and after-market automotive products, desires to re-build their brand around service and availability. Traditionally, they have committed to having parts in stock for their customers 80% of the time. The VP of marketing has asked you to determine the incremental costs of increasing the cycle-service level to 99%. Given the information below regarding replacement headlight bulbs, determine: [NOTE: part (d) is worth 3 of the 6 points in this question]
(a) The economic order quantity (using EOQ)
(b) The re-order point (using an 80% service level)
(c) The difference in TOTAL annual cost of the 80% policy vs. one calling for a 99% service level (the incremental costs asked for by the VP of marketing)
(d) The VP of operations would like to know if supply chain improvements can adequately lower costs in support of the branding initiative (the CEO does not want this initiative to increase costs).
If the average lead time could be reduced to 3 days, the standard deviation of lead time reduced to 1 day, and ordering costs to $25, by how much would this offset (or not) the difference in annual costs of a shift to a 99% service level (calculated in part c)?
In other words, is the new scenario (99% service level, 2 3-day lead time, standard deviation of lead time of 1, and $25 ordering cost) more or less expensive than the baseline case (with an 80% service level)? By how much is it more or less expensive? (Note: you must provide the correct value for full credit on part d.)
Baseline Information:
average daily demand = 10 units/day (store operates 360 days/year)
standard deviation of demand = 4 units/day
average lead time = 6 days
standard deviation of lead time = 2 days
item cost to AAP = $11/unit
annual holding cost = 30% of cost of product
ordering cost = $40/order
cycle-service level = 80%