Question: Westside Auto purchases a component used in the manufacture of automobile generators directly from a supplier. Westside's generator production operation, which is operated at a constant rate, will require 1000 components per month throughout the year (12,000 total units annually). Assume that the ordering costs are $25 per order, the unit cost is $2.50 per component, and annual holding costs are 20% of the value of inventory. Westside has 250 working days per year and a lead time of 5 days
Suppose Westside Auto decides to operate with a backorder inventory policy. Backorder costs are estimated to be $5 per unit per year. Identify the following:
a) Minimum cost order quantity
b) Maximum number of backorders
c) Maximum inventory
d) Cycle time
e) Total annual cost
Which approach would you recommend to Westside Auto, using back orders or not? Why?