Canadian Wheel Ltd. establishes SSs to provide a fraction of demand satisfied directly from stock at a level of 0.94. For a basic item with an essentially level average demand, the annual demand is 1,000 units and an order quantity of 200 units is used. The supplier of the item ensures a constant lead time of 4 weeks to Canadian Wheel. The current purchase price of the item from the supplier is $0.80/unit. Receiving and handling costs add $0.20/unit.

The supplier offers to reduce the lead time to a new constant level of 1 week, but in doing so, she will increase the selling price to Canadian by $0.05/unit. Canadian management is faced with the decision of whether or not to accept the supplier’s offer.

a. Qualitatively discuss the economic trade-off in the decision. (Note: Canadian would not increase the selling price of the item nor would they change the order quantity.)

b. Quantitatively assist management in the decision. (Assume that σt = σ1t 1/2 and σ4 =

100 units where σ4 is the standard deviation of forecast errors over the current lead time of 4 weeks. Also assume that forecast errors are normally distributed and that the annual carrying charge is 20%.)