QUESTION 3 Inventory and problem solving

Ar-Cee Hobbies (ACH) is a retail chain that sells remote-control race cars, better known as RC cars. Their most popular product is the Lightening STK which is equipped with on-road racing tires and four-wheel drive. ACH operates retail stores in Burnaby, Richmond, and Surrey. The companys head office is in Burnaby where all inventory is ordered and stored for distribution to its retail stores.

Alfonso Fernandes, ACHs warehouse manager is concerned about the increasing costs of ordering and carrying inventory for the Lightening STK model. As such, he has hired you, as consultant, to assess the companys inventory practices for this model and provide a recommendation to reduce costs. The focus of the work is on the Burnaby head office and warehouse.

Alfonso provides you with the following information:

• Annual demand for the Lightning STK is 24,000 cars. Demand for each retail store is:
  • Burnaby 8,400
  • Richmond 12,000
  • Surrey 3,600
• Currently the cars are ordered from Good Time Cars Ltd. who sells them for $125.00 per car. Good Time Cars does not offer any volume discounts on bulk purchases. ACH places an order each month with Good Time Cars for 2,000 cars.

Alfonso asked Sally, his cost accountant, to summarize key financial figures relating to the costs of ordering and carrying inventory:

• Costs to prepare and issue the monthly order is $180
• The cost of receiving and inspecting the order at the warehouse is $435

• Annual costs of warehouse leasing, insurance, utilities, and management specific to the Lightning STK are $22.25 per car.
• ACHs opportunity cost is 12%

Alfonso is considering switching suppliers for the Lightening STK model from Good Time Cars Ltd. to Four Wheel Toys Inc. Dae-Seong Gwan, ACHs purchasing manager has given Alfonso the following highlights from Four Wheel Toys proposal for the sale of the Lightening STK car:

• Four Wheel Toys will be able to supply all the demand for Lightening STK cars at a price of $115.00 per car.
• Four Wheel Toys has an automated order entry system that will reduce ACHs current order costs by $100 per order

Required:

1. State the problem in this situation. Use the course case instructions to appropriately word the statement.
2. Alternative 1: You want to assess whether an order quantity based on the EOQ method will help minimize inventory costs for ACH. To do this, prepare the following quantitative analysis based on order and carrying costs using Good Time Cars as ACHs supplier:
   1. Calculate the EOQ
   2. Calculate the annual total relevant ordering and carrying costs using the EOQ calculated in part (b)(i)
3. Alternative 2: You also want to explore the possibility of ACH switching suppliers from Good Time Cars to Four Wheel Toys. As such you will want to take into consideration the changes in costs given above and calculate the following:
   1. Calculate the revised EOQ.
   2. Calculate the new annual total relevant ordering and carrying costs using the EOQ calculated in part (c)(i).
   3. Identify 2 other costs/benefits that to consider when ACH makes a decision on which supplier to use.
4. Which of the two alternatives (b) or (c) do you recommend that ACH select?

Your answer should address the problem statement using pertinent figures from the quantitative analyses in parts (b) and (c). Include up to 2 other qualitative considerations in your answer.