A steel service center sources products from an integrated steel mill at a cost of $2,000 per ton. Demand for steel at the service center is 50 tons per month. The service center has a holding cost of 25 percent and incurs a fixed cost of $2,000 for each order. How many tons of steel should the service center order per replenishment? What is the annual ordering and holding cost incurred by the service center?

The integrated steel mill incurs a fixed cost of $4,000 for each order placed by the steel service center. Steel costs the mill $1,000 per ton and the mill has a holding cost of 20 percent. Assuming that the mill builds up its steel (for the service center) at the rate of 50 tons per month, what are the annual fixed cost and holding cost incurred by the mill as a result of the service centers ordering policy? What is the annual cost incurred by both the service center and the steel mill?

If the steel mill and the service center could work in a coordinated manner, what is the optimal order size that minimizes their joint fixed and holding costs? What annual savings could the supply chain expect as a result of coordination? Design an all unit quantity discount that the integrated steel mill could use to get the service center to order the coordinated amount without increasing annual costs at the service center.