As a purchasing manager at a large electric utility, you are faced with two suppliers, Reliable Components and Value Electric, that offer the following terms. Reliable sells the transformer for $5,000 with a minimum order of 100, and a lead time of 1 week with a standard deviation of 0.1 week. Value sells the transformer for $4,800, has a minimum batch of 1,000, a lead time of 5 weeks, and a standard deviation of 4 weeks. Imagine that you have chosen Reliable as your supplier. Value Electric wants your business and offers you the choice of three mutually exclusive alternatives: reduce lead time by 1 week, reduce the minimum batch to 800, or reduce the standard deviation of lead time to 3 weeks.
a. What are the expected annual costs of undertaking each of these options?
b. What is the expected annual cost if all three could be put into effect?
c. Would you change your decision to go with Reliable for any of these options?