Ron Hill and his wife Debora are the founders of Arva Furniture, a small-sized company in Arva, north of London Ontario that produces wooden yard and patio furniture. Since its establishment in 1975, they have had small orders from rural retailers, which they have managed with their existing equipment and staff. A close church friend introduced Ron to Larry May who was visiting his sister in Arva during the Christmas holidays. Larry is a major maintenance contractor for parks and recreation facilities of many municipalities in Southwestern Ontario. The social conversation between Ron and Larry soon led to a business talk ending in Larry visiting Arva Furniture workshop. Impressed by the quality of their products, Larry told Ron and Deborah that at the right price he would like to sign a one year contact for an order of 500 benches to be delivered in the following year pending on two conditions: a) the cut and shape of bench legs are slightly changed as per his ordered, b) the bench parts are joint using decorative galvanized (rust proof) nuts/bolts and screws. He also mentioned that if the order is handled satisfactorily it can be repeated in the future. While they welcomed this business opportunity, Ron and Debora requested a week to evaluate the offer before signing the contract. Larry agreed as he was planning to stay in Arva for ten days.

Next morning at breakfast Debora found Ron quiet and worried so she asked him if it was because of this new business offer. “I don’t know, Deb”, Ron said “it is a heck of deal for us, but I am worried because delivering 500 benches a year with the specs Larry wants could be challenging! I am not worried about timely production and delivery of this order over a year, but we need to be very careful about ordering the material because the joints are expensive decorative parts and must be custom-made. Since we cannot tie a lot of money to inventory we have to order parts wisely. What’s more, we may need to buy new machinery to do the custom cutting of the bench legs as per order specs!” Debra suggested they talk to their foreman, Alex to evaluate the operational challenges they may face. They called Alex to inform him of the offer and asked him to do quick market search for the new material and meet them in two day so that they could discuss it.

In their meeting Alex outlined two concerns with the new order: 1) careful and timely ordering of the new material (galvanized parts) to minimize inventory cost, prevent interruption in production and hinder delivery of benches and b) the new cutting/shaping of the legs that introduces changes in process. “Considering the order we will need to make 1-2 benches a day without hindering our regular production. For this order we averagely need 55 set of galvanized parts per day with a standard deviation of 6 sets depending on other production commitments we have”, said Alex. Debbie asked Alex how they should go about the custom cutting/shaping of the leg. Alex believed the company had three options: a) buy and refurbish a used multi-purpose saw with one-year warrantee at a cost of $80,000 , b) add some new blades matrices to their existing table saw at a cost of $ 100,000, but the blades need to be replaced after 15 months of use or c) buy a new computerized universal table saw with three years warrantee at a cost of $150,000. The three options would be associated with $100, $ 80 and $60 in operating costs (labor, wood supply and regular maintenance) per bench respectively. Examining the supplier’s quote for the galvanized parts Ron noted that they would come in cases of 8 sets and the supplier charges $10 processing fee and requires 5 days to deliver each order. She also knows that the holding cost per set is about $1.44. Ron believed if Arva could maintain a 95 percent success in production and delivery, they would have a chance for repeat business from this account.

With the above information Ron and Debora have hired your group as consultants to help them with the following to make a decision on this business offer:

1. What should they do about their equipment and why?
2. What is the optimal quantity for ordering the galvanized parts?
3. What should their reorder point be for galvanized parts?
4. What is the total annual inventory cost for galvanized parts if Arva adopts continuous review (Q) system?