Question 2

Red Fish have a distribution centre (DC) in each province in which they store their inventory. They are planning their purchasing for the year and have various items that they need to order. One of the products that they need to order is soy sauce. They usually order cans of three litres each that they then use to fill smaller containers in the restaurants. As refrigerating the soy sauce keeps it fresher for longer, they store it in a refrigerator in their DC, which incurs more costs.

Red Fish usually buy 240 cans of soy sauce in a year. Each can costs R250 and the holding costs add up to R30 a year, while ordering or setup costs amount to R100 per order. Red Fish is open all year round and therefore operates a 365-day year.

Considering this information, calculate the following for Red Fish:

2.1 Kanban Soy Sauce Ltd. manufactures 1,000,000 cans of soy sauce annually. Which means that in a 250-day year, they will produce an average of 4,000 cans per day (1,000,000 250). Kanban sees that they need to actually produce 4,250 cans per day to be more efficient. Use the production order quantity model and the information provided below to work out the optimum number of units per order. (Round off to the nearest whole number.)

Annual demand: D = 1,000,000 units

Setup costs S = R10

Holding cost H = R25 per unit per day

Daily production rate p = 4,250 units daily

Daily demand d = 4,000 units daily

2.2 Red Fish would also like to calculate the re-order point to find out when they need to order more soy sauce before they run out. The annual demand for soy sauce from all ten restaurants in the Western Cape amounts to 240 cans per year. Remember that Red Fish is open all year round. It usually takes 4 days to deliver the soy sauce to the DC. Calculate the reorder point (ROP). (Round off to the nearest two decimal places, i.e. 2.38754 should be written 2.39)

2.3 The total annual variable cost. (Hint: Remember that holding costs are equal to setup costs.)