Denton Pet Clinic is a small business owned by two veternarians who employ two full-time staff members and a new part-time busi- ness manager. The business manager believes that Denton could save money by improving its inventory management, even though Denton Pet Clinic stocks very little except pharmaceuticals, clean- ing supplies, and some miscellaneous products. In the case of phar- maceuticals, Denton purchases most drugs from a supply company who offers very good prices and who ships to veterinarians over- night for a flat fee of $15. Using this overnight service, Denton Pet Clinic has been in the habit of simply ordering a dozen boxes of any drug when only a few doses of that drug remain in stock near the end of a business day. The business manager has gathered the information, shown in the table below, on the three most common drugs purchased routinely from this supply company, whose prior purchasing accounts for nearly 70% of all money spent on pharma- ceuticals by Denton Pet Clinic. 

The business manager estimates that Denton's holding costs for these small but expensive supplies is best estimated by the business's cost of capital, 15%. Interest- ingly, the business manager suspects that Denton's habit of always ordering one dozen boxes probably isn't a bad rule-of-thumb, although somewhat better order sizes might be identified if this issue were treated more scientifically. Rather, the business manager is troubled by the fact that Denton has always treated the issue of ordering each of the three drugs separately, never taking advantage of the fact that the supply company will deliver overnight for $15, regardless of the number of different drugs in the order. Coordinating the replenishment of these three important supplies to Denton Pet Clinic might provide substantial savings on that delivery fee, given that the business manager can devise a plan that at least partially synchronizes the ordering of two or more drugs.

Questions

1. Assuming constant demand for the three drugs and the historical ordering policy described, how much has Denton Pet Clinic been paying annually in holding costs and ordering costs for these supplies? 

2. If the business manager were to use the EOQ model, what should the order size of each drug be changed to? How much will be saved annually by changing to this more scientific order size, in the case of each drug? 

3. Consider the business managers idea of coordinating of inventory policies to avoid the $15 fee being charged to each drug in at least some cases. How would this work? Design and describe a lower-cost inventory policy that saves additional money by making use of this coordination. 

4. If Denton Pet Clinic were to follow your improved plan, how much would Denton pay annually in holding costs and ordering costs for these supplies? How great a savings is that, compared to what it is paying now with its historical rule-of-thumb ordering?

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Three Most Common Pharmaceuticals Drugs Purchased Rabies booster vaccine, feline, 10 doses per box Distemper booster vaccine, feline, 10 doses per box Broadband antibiotic, 100-ml ampoules, 50 per box Average Monthly Usage by Denton Vets 4 boxes Unit Cost $120 per box $210 per box 20 boxes $400 per box 20 boxes