Ryanair is a popular budget airline that has employed multiple strategies to maintain its competitive edge. One of its approaches involves reducing the turnaround time between flights by eliminating seat pockets and tray tables to facilitate quicker cleaning. Additionally, the airline flies to secondary airports and imposes weight limits on carry-on luggage by charging fees, among other tactics. Ryanair’s choice to operate solely with the Boeing 737 model allows for streamlined maintenance operations and a reduction in unnecessary expenses.

Another way to cut cost is inventory management. For example, the company uses 52,500 tires per year. Because of the physical constraints endured by these tires, they are expensive, $2,000 each. Ryanair’s holding costs H are 30% of the unit cost per year. To purchase tires, they rely on reverse auctions where they specify the number of tires, tire characteristics, and delivery schedule. Tire companies then submit bids to try to win the business. Ryanair procurement managers are fond of this purchasing method, but it is expensive, costing the company about

$70,000 each time the company goes through this process to place an order.

Questions:

1. Assuming that the lowest bid for tires will be $2,000, how many tires should Ryanair order each time it places an order?

3500

2. Referring to your answer in part a., how many orders per year will Ryanair need to make per year if the demand for tires remains at 52,500?

15

3. Referring to parts a. and b., what is the total yearly inventory cost (i.e., setup cost + holding cost)?

Setup Cost = DS/Q		$1,050,000
Holding Cost = HQ/2		$1,050,000
Purchasing Cost = D*C		$105,000,000
Total Yearly Cost		$107,100,000

4. Assuming that demand for tires is steady throughout the 365-day year, and if lead time on getting tires is 9 days, at what inventory level should Ryanair place an order?

WOULD THIS BE (DEMAND divided 365) multiply by 9 ???

5. Suppose Ryanair could find a tire supplier who could deliver tires at $2,050 each, in a just-in- time arrangement. They would deliver the exact number of tires needed on site, each day so that Ryanair would not need to carry any inventory. Under this condition, Ryanair believes its cost of receiving the tires each day would be $1,000.
   • Calculate the total yearly cost of each of the two options (reverse auction and just-in- time), including purchasing costs.
   • Should Ryanair consider the just-in-time option? Discuss both the financial and non- financial aspects of this decision.