DBS Manufacturing Company uses a special component to make its top-of-the range product. DBS requires an average of 10,000 units of this special component every year in its manufacturing process. The major supplier of the special component that DBS has been dealing with, is a preferred supply chain partner who will charge a unit price of $1500 for the component. Each order costs $250 to process. Because of limited storage space the operations manager wants to factor in inventory holding cost at 27.50% of the unit price. If DBS keeps sourcing the special component from this supplier then: (a) Determine the economic order quantity (EOQ) and total annual inventory cost. DBS is proposing to enter into a joint research-and-development project with the supplier to bring down the component cost. If this joint research-and-development project is successful, the unit price of the component is expected to fall by 25% relative to the current price. If everything else stays the same, what will be the revised EOQ and total annual inventory cost? (3 marks) (b) Assuming the proposed research-and-development project in partnership with the supplier is successful, how much will DBS be able to save by adopting the revised EOQ versus a current Q = 200? (2 marks) Page 3 of 6 MMM267 Business Logistics T1 2020 (c) Assume that the proposed research-and-development project in partnership with the supplier is successful. What is the reorder point with safety stock if lead time is 28 days, standard deviation of weekly demand is 8.25 and DBS operates for 40 weeks every year; with 7 work days per week? Assume a z value of 1.645 corresponding to the desired service level as specified in DBS' operating procedures. What would the reorder point be without safety stock? How would you interpret the two reorder points (i.e. with and without safety stock)? (3 marks) (d) Environmental considerations, material losses and waste disposal can be included in the EOQ model to improve inventory management practices. Assume that on an average 5% of the components that DBS purchases are damaged in transit thus becoming unusable & have to be disposed of. Disposal cost is $20 per unit if disposal is carried out sustainably. Find the EOQ and the total annual inventory cost when disposal costs are incorporated into the model. What implications do these results have for the sustainability of DBS' inventory practices? DBS Manufacturing Company uses a special component to make its top-of-the range product. DBS requires an average of 10,000 units of this special component every year in its manufacturing process. The major supplier of the special component that DBS has been dealing with, is a preferred supply chain partner who will charge a unit price of $1500 for the component. Each order costs $250 to process. Because of limited storage space the operations manager wants to factor in inventory holding cost at 27.50% of the unit price. If DBS keeps sourcing the special component from this supplier then: (a) Determine the economic order quantity (EOQ) and total annual inventory cost. DBS is proposing to enter into a joint research-and-development project with the supplier to bring down the component cost. If this joint research-and-development project is successful, the unit price of the component is expected to fall by 25% relative to the current price. If everything else stays the same, what will be the revised EOQ and total annual inventory cost? (3 marks) (b) Assuming the proposed research-and-development project in partnership with the supplier is successful, how much will DBS be able to save by adopting the revised EOQ versus a current Q = 200? (2 marks) Page 3 of 6 MMM267 Business Logistics T1 2020 (c) Assume that the proposed research-and-development project in partnership with the supplier is successful. What is the reorder point with safety stock if lead time is 28 days, standard deviation of weekly demand is 8.25 and DBS operates for 40 weeks every year; with 7 work days per week? Assume a z value of 1.645 corresponding to the desired service level as specified in DBS' operating procedures. What would the reorder point be without safety stock? How would you interpret the two reorder points (i.e. with and without safety stock)? (3 marks) (d) Environmental considerations, material losses and waste disposal can be included in the EOQ model to improve inventory management practices. Assume that on an average 5% of the components that DBS purchases are damaged in transit thus becoming unusable & have to be disposed of. Disposal cost is $20 per unit if disposal is carried out sustainably. Find the EOQ and the total annual inventory cost when disposal costs are incorporated into the model. What implications do these results have for the sustainability of DBS' inventory practices
