The May-Bee Company distributes smart devices. Approximately 50 percent of the company's SKU are imported and the rest are acquired from domestic suppliers. May-Bee sales have been increasing at a steady rate and future trends appear very optimistic. The company is wholly owned by a Mr. Brown, who relies heavily on the bank for working capital. The current credit limit is set at $150,000, and Mr. Brown is experiencing some resistance from his banker in getting more cash to increase his investment in inventories to meet an anticipated increase in sales.
In the past Brown has used only simple decision rules for ordering from his suppliers. He orders a three-week supply of SKUs that cost more than $10 per unit and a six-week supply of items that cost less than $10 per unit.
Last year May-Bee's average inventory was around $1,000,000. He paid $19,500 interest on his bank loan, $80,000 rent for his warehouse, and $15,000 to insurance companies. Brown believes it would be profitable to increase his bank loan because he feels he could probably earn 15 percent on the borrowed money.
The following six items represent 30 percent of May-Bee's annual dollar sales volume and are according to Brown, his bread and butter.
|
SKU Number
|
Value/unit ($)
|
Annual Demand (unites)
|
|
1
|
15.78
|
6,400
|
|
2
|
40.50
|
2,200
|
|
3
|
18.30
|
4,500
|
|
4
|
8.40
|
3,500
|
|
5
|
9.70
|
6,000
|
|
6
|
25.00
|
4,800
|
*Items imported from the same supplier
Brown gets directly involved with the ordering of imported items because for these items he has to go to the bank to get a letter of credit and, on average, spends about sixty minutes per order doing so. An order for imported items had in the past included from one to ten SKUs.
The following table gives a summary of the costs involved in placing an order. These estimates were supplied by the persons involved, who guessed at the amount of time involved in each activity.
|
Hourly Person Involved
|
Rate ($)
|
Time Per Order (minutes)
|
|
Domestic
|
Imported
|
|
Typist
|
3.00
|
20
|
24
|
|
Inventory clerk
|
3.20
|
20
|
20
|
|
Receiver
|
4.50
|
30
|
30
|
|
Bookkeeper
|
4.20
|
20
|
20
|
|
Mr. Brown
|
20.00
|
20
|
60
|
In addition, there was a charge of $10 per order, which represented the bank charge for the letter of credit for imported items, whereas the bank charges were only $0.25 per order for items acquired from domestic suppliers.
1) This cost description was compiled by the bookkeeper. In your opinion, are there any costs that have been left out? Comment briefly.
2) Compute May-Bee's carrying cost (r)
3) Compute the cost of placing an order for a single domestic and for a single imported SKU
4) Compute the EOQ for six items.
5) Compute the total cycle stock for the six items under current ordering rules.
6) Compute the total relevant costs for the six items using EOQ
7) Compute the different in total relevant costunder (5) and (6). Estimate the change in total relevant costs for all the 100 items.
8) Compute the total number of replenishments for the samples of six items under the current system and under the EOQ policy.
9) Draw an exchange curve of total relevant costs versus N for imported items. From the graph calculate the increase or decrease in total relevant costs if the combined total number of orders for the three imported items is charged to thirty-six per year.
10) Compute the total relevant costs (ordering costs plus holding cost) under the current systems and under the EOQ policy. What are the estimated savings (percent) if the EOQ policy is applied throughout the whole population?