Alpha Appliances, Inc.

Alpha Appliances, Inc. is a major distributor of household appliances. Its customer base consists of

local retailers who stock a variety of products including appliances. Alpha purchases bulk of its

products from China, Mexico, India, and Thailand. The business has been good.

In past few months, Jay Adams, VP$-$Marketing has received numerous complaints from its

customers that they have not been receiving supplies on time, costs have gone up$,$ etc. Jay calls a

meeting of his sales manager Kathy Land, production manager Abraham King, and procurement

manager Ashley Thompson.

Jay Adams: Good morning, ladies and gentlemen! How are you guys!

Kathy, Abraham and Ashley all respond with a smile.

Jay: Lately I have been receiving a lot of complaints from our customers and that worries me$.$

Ashley: I am not aware of it$!$ What are the complaints about?

Jay: There are complaints such as our product prices have gone up$,$ we are not able to deliver on

time, and so on$!$

Abraham: Are the complaints specific to a product, or across the board?

Jay: Well, I am not sure. We probably have problems with many of our products. The most serious

problem however seems to be with our very popular ceiling fan model B$23$Y$5.$ Ashley, are you

aware of any issues either with this product or its supplier?

Ashley: Well, we have been buying this product from China with a company named Xanu

Enterprises. They have recently raised prices, so we were forced to raise ours.

Jay: Abraham, do you think we can buy parts and assemble this fan in$-$house?

Abraham: Yes, we have the capability to do so$.$

Jay: Kathy, why do our customers complain about late deliveries? Do not we have a good idea of

the future demand?

Kathy: We do forecast as best we can. But I guess sometimes we mess up$!$ If we do a better job of

forecasting, this problem can be minimized.

Jay: Well, we have had good discussion of the situation. I am giving you guys one week of time to

do your homework. Ashley, try to identify more reliable vendors; Abraham, estimate the cost if we

do in$-$house production; and Kathy, you come up with a more reliable forecast.

Kathy, Abraham and Ashley all nod their heads, and the meeting is adjourned.AFTER ONE WEEK

The meeting takes place, and the following data is presented.

ASHLEY THOMPSON: We have identified two more reliable vendors with following cost structure.

Xanu Enc. $$32$ per fan, lead time fixed $-3$ weeks

Weni Inc. $-$ $$33$ per fan $($if purchase quantity is below $1,000)$

$$32$ per fan $($if the purchase quantity is between $1,000$ and $2,000)$

$$31$ per fan $($if the purchase quantity is between $2,000$ and $5,000)$

$$30$ per fan, if the purchase quantity is above $5,000.$

$($Lead time fixed, $2$ weeks$)$

Yama Inc. $$31$ per fan, lead time variable, will require a safety stock of $200$ fans. The

ordering cost is $$400,$ irrespective of the vendor.

ABRAHAM KING: We can produce this product with following cost and related data.

Cost of production of fan: $$31$ per fan

Production rate: $300$ fans$/$day

Production Set up cost: $$2,000$

KATHY LAND: We have examined recent past sales data and recent market trends. We expect

daily demand to about $50$ fans.

The management estimates inventory costs to be about $$4$ per year per fan. After accounting for

holidays, it is estimated the company is in business for about $250$ days in a year.

Answer the following questions. Show all work that you need to arrive at the final

answer.

If Alpha did not want to go for in$-$house production, which of the three vendors it should

choose? Why?

If Alpha decides to produce, how many fans should it produce in a single batch?

Should company buy or produce? Justify your answer.