Problem 1:

A large scale pharmaceutical manufacturing company estimates, based on a shipping fee of $1000 per order, that they can optimally balance inventory holding costs and shipping costs for one of their frequently used chemicals if they receive shipments of this chemical at an average rate of 4.5 times per year. The annual demand is 6500 tons. Suppose that they wish to instead receive shipments every month in order to reduce the working capital requirements of holding inventory.

(a) What shipping fee should they negotiate with the supplier?

(b) Based on this new shipping fee, what would be the reduction in annual holding cost as compared to their prior situation? Assume that they operate optimally.

Problem 2:

Weekly demand for diskettes at a retailer is normally distributed with a mean of 1000 boxes and a standard deviation of 150. Currently, the store places orders via paper that is faxed to the supplier. Assume 50 working weeks in a year and the following data:

1. Lead time for delivery of an order is 4 weeks

2. Fixed cost per order is $100

3. Each box of diskettes costs $1

4. Holding cost is 25% of purchase cost

(a) Assuming that the retailer wants the probability of stocking out in a cycle to be no more than 5%, provide a recommendation to the store manager (who has never been to business school) on the inventory policy (a policy regarding EOQ and ROP).

(b) Claiming that it will lower lead time to 1 week, the supplier is trying to push an electronic data interchange (EDI) system on the retailer. Provide a brief qualitative discussion on the benefits and costs of such a system. How would you make the system adoption decision?