Dee Rodgers and Carol Millican own a start-up company which just began supplying the JoPro mini-cam. Both Dee and Carol expect to sell 900 cams over the next year (300 days), but they are uncertain as to how they should procure and inventory the cameras.
Dee prefers to order the cameras from an outside supplier where she can obtain them at $50.00 a camera to be delivered within 2 days of an order. She estimates ordering cost at $20.00/order. Annual carrying charges include 15% interest charge along with insurance and taxes that amount to $2.50 per unit of average inventory (these are two separate costs and both need to be factored into Ch).
Carol prefers to produce the cameras internally. She claims that the company has current capacity to produce 6 cameras a day. The setup cost (ordering) and carrying costs remain the same as if the cameras were purchased from an external vendor.
1. If Dee’s plan is followed, how many cameras should they order at one time, what is the reorder point, and what is the associated total annual inventory cost? Support your solution with calculations.
2. If Carol’s plan is followed, how many cameras should they produce at one time, what is the time between the start of consecutive production runs, and what is the associated total annual inventory cost? Support your solution with calculations
3. Which plan would you recommend and why?
4. Suppose Dee finds a dealer that will give her a 2% discount on her original unit cost in part (a) if she orders at least 900 cases at a time. (Assume ordering cost remains at $20/order). Would your recommendation change? Explain why or why not
5. Suppose that Dee wants to investigate the possibility of backordering cameras. She estimates that the stockout cost would be only $.50 per camera per year. For this plan, how many cameras should be ordered at one time, what is the reorder point, and what is the associated total annual inventory cost?
6. What is your final suggestion to Dee and Carol concerning the inventory policy that they should adopt? Why?
7. Illustrate each of the above inventory policies with the appropriate diagrams.