Soo found the offer an attractive one. He planned to retool a HANDY SEW COMPANY part of his plant to manufacture the hard plastic body of the product. The technology needed was familiar to him and his wackers. His problem was how to market the product and how to control costs. Menagenial Finance Cancept Managing inventory by minimiz- He believed that there was a growing market for convenient Fnncial Anslynis Technique Decision Contert equipment such as a hand-hald sewing machine that could sew and mend clothes, bedsheets, curtains and other similar light materials. Travelers would find it useful and could easily pack it suitcases. It could also be useful at home for mending work. The machine was easy to set up, battery operated, and simple operate. Economie order quantity : Amanufacturer oft hand-helid sea- ing mochire wants so cetermine the opomuminventory and salety stock levels for precision parts Andy Soo, owner and general manager of Handy Sew Company a start-up business, was preparing the inventory plan for his oompany for the next five years. The company was set up to manufacture, assemble and sell hand-held sewing machines Critical parts of the product were precision components that the machine under the control of a microchip. Soo believed that the economic order quantity (EOQ) model would be useful in managing The set of precision parts of the machine was a reduced-scale version of that found in standard sewing machines. They could perform the same functions except for limitations in handling heavy textile materials and in sewing more intricate p These components accounted for more than 80 percent of the total product cost. Their patents were held by Single Machines in Hong Kong, and they were manufactured at a highly autom plant that shipped to e worldwide distribution network. run purchasing and inventory of this component. The Business and Product Due to the importance of these precision parts in his compa- ny's profitability, Soo wanted to use the economic order quantity model for his purchasing and inventory planning Andy Soo, who had a plastics manufacturing business in Manila, saw a business opportunity while visiting Heng Kong. A ocal manufacturer of a hand-held sewing machine in the colony Single Machines Company, invited him to run a franchise in the Philippines to assemblu and sell its product. After a brief negotia- tion, the two parties struck an agreement allowing Soo to manufacture the hard plastic body of the sewing machine and to purchase all precision components from a distributor in Manila Final assembly of the body and precision parts could be done with Plans for Precision Parts Inventory The hand-held sewing machine was only one of the many plastic products that Soo was selling. He wanted to start slow while exploring the market. He conducted a study of the li market, which he believed was the two-income family oriented to travelling for business and pleasure. He also estimated the ordering and carrying costs of the precision parts for the next tive years screwdriver He forecast annual requirements for precision parts to i crease from 8,000 sets on the first year to 16,000 sets in the fi year. Soo expected ordering costs to decline from P8,200 per to the requirement by Single Machines for inspection and audit of ndy Sew to ensure that earlier orders went into bona fide model and those under the twice-a-year purchase plan. it the ditference was not substantial, he would drop the EOQ model. of the sewing mechines covered by the agreement Soo expected the carrying costs to increase from 6 percent of the average inventory value in the first year to 14 percent in the fifth year. The projected increases reflected the increasing costs of controlling warehousing losses in high volume operations. The microchips and miniaturizad sewing machine parts were sensitive to handling and piferage osses. Table 1 shows the forecast volumes, ordering costs and carrying costs for the next 5 years GUIDE QUESTIONS Table 1. Forecast of Volume Carrying Cost and Ordering Cost for Precision Parts (5 yearsl cl If the company uses the EOQ model: What is the average inventory of precision parts? At what level of inventory should the company reorder to ensure that it maintained the safety stock? Calculate the annual total inventory cost. . Yes . 8,000 9,000 11,000 13,000 16,000 Volums Isots Ordering costs PB,200 P5.000 P3,800 P2.500 P800 avernge inwentory 10 12 The purchase price of one precision parts set was set under the agreement at P3.250 in the first year. A price escalation of 10 percent per year was stipulated in the agreement. The distributor of Single Machines in Manila promised a lead time af 10 days but warned that, due to inspection requirements, it could be as short s five days or as long as 14 days. Soo thought that he oould set up a safety stock to meet the problem of highly variable purchesing lead times. Looking at the information he had put together, Soo began to think that the problem might be too complex for him to handle. Before consider- the EO0 model, his plan was to purchase the precision parts twice a year and to keep sufficient storage spare to handle the