Heinkel-Fishbein is a large importer and distributor of robotic toys. The toys are stored in the warehouse and are shipped to a several large retail chains at a unit price of $60. The retail stores sell the toys at $99.95, or at discounted prices on sale days. There is almost no possibility in the near future of changing the prices at which Heinkel-Fishbein supplies the retail stores.

Considering one toy, identified as SKU 2600, the process consists of receiving the boxes as shipped by the manufacturer, and storing in the warehouse to be divided and shipped to the stores as per shipment schedule. The cost factors are described as follows. The supplier has a discount schedule, and the prices are lower for a higher volume of order, or shipment. Two suppliers are considered here, and their discount schedules are shown in Tables C1 and C2, respectively. The inventory holding cost remains the same for both suppliers at 0.25 (25%) of the purchase price. The Ordering Cost (Setup Cost) is also the same at $60. The annual demand for SKU 2600 is 24,000 units[1]. The reason for having alternate suppliers is that the contract is up for review for the next year, and the company needs to determine the best policy.

Under the current contract, the toys are produced and supplied by Schneider Gmbh in Germany, with an annual contract for regular and timely supply. The discount schedule for the contract, and the prices related to this contract, are shown in Table C1. An alternate set of prices and discounts has been obtained from Yamaguchi in Japan, as shown in Table C2. Heinkel-Fishbein must consider the two set comparatively for the next year.

Table C1.

Quantity	Price
1 - 1999	$40.00
2000 - 3999	$38.00
4000 - 7999	$35.00
8000 +	$32.00

Table C2.

Quantity	Price
1 - 1999	$40.00
2000 - 3999	$36.00
4000 - 7999	$34.00
8000 +	$32.00

From the pricing tables, as given above, it is evident that the Yamaguchi offer is attractive with respect to pricing based on volume. However, there are some concerns. The lead- time for delivery from Germany is typically 10-12 working days, or 2 weeks. The lead-time for delivery from Japan is at least 4 weeks. This places a pressure on Heinkel-Fishbein to stock a larger number of units to account for the variability of demand in lead-time and the possibility of a stockout. The contract requirements with the retail stores state that in the case of a stockout, Heinkel-Fishbein must pay a penalty of $100 per unit of stockout. Typically, a stockout occurs in periods of high demand, such as holidays and special demand periods. There is a need to define the inventory policy for the coming year.

Questions

1. Considering costs alone, what are the respective costs of the different ordering policies?

2. In a JIT environment, a typical approach is to consider annual demand as the quantity of an order, with prices that apply to this quantity. Comment on this approach in this context.

3. Comment on the cost of stockouts, and the need for avoiding stockouts in terms of the costs. What does it do to inventory policy?