Chapter 12: Inventory Management at Cruise International, Inc.

Details of Your Next Assignment

In this assignment you will work for Andrew Jaworski, the cruise ship's medical officer. He has a special offer from a supplier for a disposable syringe filled with a pre-measured dosage of medicine to alleviate motion sickness that needs to be evaluated. You need to meet with Dr. Jaworski.

"Hi, how is it going? I hope we are keeping you busy enough. I heard that you did a great job on your previous assignments. I need your help in evaluating an inventory replenishment problem for our disposable syringes filled with a pre-measured dose of motion sickness medicine. We estimate that about 1% of the 60,000 passengers we transport each month will need the shot during their cruise. These syringes normally cost us $96 per dozen. The supplier has been very reliable and consistently delivers the materials ordered in 30 calendar days. There is no uncertainty about supplier lead time. However, the number of syringes used each month by the onboard medical office is not certain because we cannot accurately predict demand. We keep a safety stock of one month's average requirement. I am not sure if we need to hold this much safety stock, but I was burned once when we hit some really turbulent seas, so I am a little cautious now. Yesterday, the supplier offered us a price of $7 per syringe if we purchase a minimum of 25 dozen syringes at a time, or a cost of $6.25 per syringe if we purchase the entire year's requirement at one time. I am not sure whether to change our current policy or not. I want you to analyze the problem and make a recommendation. In addition, Peggy Johnson (the corporate medical officer) tells me that a new motion sickness medicine is currently being tested by the Food and Drug Administration (FDA). This new medicine might make the other medicine obsolete. She believes there is a 10% chance of the new medicine being approved and we will know in approximately nine months. Explain how this might affect your recommendation.

"Our corporate purchasing department's annual payroll including fringe benefits is $300,000. The purchasing department occupies 500 square feet of space that costs $4.00 per square foot per month, or $48.00 per square foot per year. In addition to their payroll and space costs, the normal annual overhead rate is 40% of the purchasing labor cost. The purchasing department typically processes about 1000 purchase orders monthly. Holding inventory is quite costly since this medicine must be refrigerated and kept in a secured area. Corporate accounting estimates a holding cost of $10 per dozen per month. In addition, there is a problem of perishability which accounting believes occurs about 4% of the time. The accounting department uses a 15% rate as the cost of capital."

Assignment Questions for Chapter 12.

Develop an estimate for the fixed ordering cost at CII.

Develop an estimate for the current annual holding cost per unit at CII.

Develop an estimate for the annual holding cost per unit for the supplier's offers.

Develop a recommendation with regards to accepting one of the supplier's offers.

Present your results in written form (many complete sentences). Explain how you came to your conclusions. Show every step of your work, both for Andrew's information and in case he gets audited.