Clothes, Inc. makes polo shirts. On average, they use 100 bolts of red cotton fabric per day (25,000 bolts per year) to make their red polos. Cotton costs $80 per bolt. The company purchases their fabric from Best Materials, Inc.
The following additional information is known:
• On average, it takes 4 days from the date an order is placed with Best Materials to receive a fabric order.
• Average cost (in the purchasing and accounting departments) to place and process a single order with Best Materials - $45
• Average cost (in the factory) to receive and inspect a single order from Best Materials - $5.
• Average annual insurance cost of holding one bolt of fabric in inventory - $1.50
• Average annual handling and spoilage cost of holding one bolt of fabric in inventory - $4.50
• Clothes, Inc. uses 5% as their cost of capital. The purchasing manager has been asked to control the amount of material on hand (not too little, not too much). Given the information above and using the techniques learned in class:
a. At what point (what inventory quantity level) should the purchasing manager place an order for fabric? Clothes, Inc. desires a 84.13% customer service level. Standard deviation of demand is 25 bolts. Lead time is not variable. Show calculations to support your answer.
b. What is the total ordering cost for one shipment of fabric from Best Materials? Show calculations to support your answer.
c. What is the total annual cost to carry one bolt of cotton fabric in inventory? Show calculations to support your answer.
d. Using the EOQ model, how many bolts should the purchasing manager order at the reorder point? Show calculations to support your answer.
e. Assuming the purchasing manager accepts your answers in a. and d., what’s the total annual cost to Clothes, Inc. of ordering and carrying cotton fabric in inventory?