You are the Inventory Manager for about 3,700 individual SKUs. The items are reasonably homogeneous; each SKU has a unit value of about $5, plus or minus $1. The usage rate for each item is about 6000 units per year, plus or minus 10%. Demand for these items is stable and stationary; no volume discounts are available. Your current procedures involve an annual holding cost of 18%. Current purchasing practices result in ordering costs of about $50 per order without regard to order size.

You are considering the implementation of a more "web-based" ordering system which should reduce your actual ordering costs to about $5 per order placed, no matter how many orders you place.

1.How much would you be willing to pay to implement this new ordering system?

2.How confident are you in this estimate? Explain and quantify your answer.

3.Suppose you could actually reduce the ordering cost to $0.05 per order. Now how much would you be willing to pay for the new system?