Scenario 1 Robert Morris Health

Robert Morris Health (RMH) is a 9-hospital integrated delivery network based in the Pittsburgh area in the United States. Currently each hospital orders its own supplies and manages the inventory. A common item used is a sterile Intravenous (IV) Starter Kit. Weekly demand for the IV Starter Kit is 600 units. (We assume that one year is 52 weeks.) The unit cost of an IV Starter Kit is $1.50. Robert Morris has estimated that the physical holding cost (operating and storage costs) of one unit of medical supply is about h = 6 percent per year. In addition, the hospital network's annual cost of capital is r = 12 percent. Note that H = (h + r)*C. Each hospital incurs a fixed order cost of $150 whenever it places an order, regardless of the order size. The supplier takes one week to deliver the order. Currently, each hospital places an order of 6,000 units of the IV Starter Kit whenever it orders. Robert Morris has recently been concerned about the level of inventories held in each of the hospitals and is exploring strategies to reduce them.

The director of materials management is considering the following options:

1) Increase the frequency of ordering by reducing the current order size

2) Centralize the order process across all 9 hospitals and perhaps serving all the hospitals from a single warehouse

1.1 (1 point) What is the economic order quantity? Answer: Q^* = units/order.

1.2 (1 point) What is the economic-like order quantity Q^# in a multiple of 500?

Answer: Q^#= units/order.

1.3 (2 points) Compare the total annual costs of one Robert Morris hospital at the economic order quantity Q^* and at the economic-like order quantity Q^# in a multiple of 500 units?

Answer:

	Order Cost	Holding Cost	Material Cost	Total annual cost
Q*
Q#

1.4 (2 points) Compare the total annual order and holding costs and the inventories across all the Robert Morris hospitals at their economic order quantities before and after centralization.

Answer:

	Total annual cost (across all hospitals)	Order and Holding Costs	Inventories
Before Centralization
After Centralization