Consider two products A and C. Forecasted annual demand for Product A is 2,000 units and for Product B is 12,000 units. Assume that both products are purchased from a supplier, and there is a $200 transaction cost for each order. This cost is the same for both products. Holding cost for inventory of the item is dependent on the value of the product and it is estimated to 5% of the unit cost for Product A and 1% of the unit cost for Product C. The full-price paid to the supplier is $53/unit for Product A and $2/unit for Product C. In other words, Product C is a much cheaper product than Product A. Assume that you would plan for a steady demand for the products throughout the year but there would be daily variations in the consumption of the two products. Assume the daily standard deviation for Product A is 20 units and for Product C is 3 units. Therefore, Product C has a more stable demand compared to Product A. The average lead time of supply, counted as the time between when an order is placed to the supplier to the time when the company receives the order, is 6 days. Assume that the lead time is the same for both products.
Formulate an inventory policy for the two products with respect to order quantities, reorder level, safety stock and order interval. As part of this analysis, your decision needs to incorporate the type of inventory system that you plan to operate for each product.
Would your decisions above change if there is a 2% discount provided by the supplier on the price of the products any time the order size exceeds 5,000 units? If so, what will be the changes?
(Make any other assumptions you may need to arrive at the decisions. State the assumptions clearly. Also, any conclusions you derive for the above decisions need to be supported by the appropriate analysis/calculations).