An arrangement, sometimes made between a supplier and a customer, is what is called a

“standing” order. Under this arrangement, the supplier ships a fixed quantity Qf at regular intervals (R time units apart) throughout the year. Because of the customer commitment for regular shipments, the supplier offers an attractive unit cost, vf . However, because demand is variable, special auxiliary orders must be placed from time to time and/or one or more of the standard shipments may have to be postponed for R units of time. Suppose a particular steel products distributor, Salem Inc., is considering a standing order arrangement for a specific product with a supplier, Jericho Steel. The demand rate for this product averages 12,000 units/year. For a standing order arrangement of 1,000 units each month, Jericho offers a unit price (including shipment cost) of $2.00/unit. Without a standing order arrangement, the unit price (including shipment cost) is $2.20/unit. The Salem inventory manager estimates that the fixed cost associated with any standing order is $25, whereas the fixed cost of any other order is $35. Salem uses a carrying charge of 0.26 $/$/year. If a standing order arrangement is adopted, auxiliary orders can only be placed so as to arrive with standing orders (the lead time for such an auxiliary order is 1 month; in fact, this is the lead time of any nonstandard order). The decision to postpone a standard order also must be made 1 month before its scheduled arrival. Assume that demands in non-overlapping periods are independent, normally distributed variables with a standard deviation of 250 units for a 1 month period. Salem wishes to ensure a maximum probability of 0.03 of a stockout on any replenishment.

a. If the standing order policy was adopted, indicate how you would assist Salem in deciding on i. When to place an auxiliary order ii. When to postpone a standard order

b. Indicate how you might use a model to ascertain whether Salem should even adopt the standing order arrangement. LOP52