You are a purchasing manager in charge of stocking a certain type of transformer for a large electric utility. Weekly demand among your field crews for these transformers is normally distributed, with a mean of 100 and a standard deviation of 50.

Holding costs are 25 percent, and you must hold a level of inventory corresponding to a cycle service level of 95 percent. You are faced with two suppliers, Reliable Components and Value Electric, who 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 lead-time standard deviation of 4 weeks.

a. What is the annual cost of using Reliable Components as a supplier?

b. What is the annual cost of using Value Electric as a supplier?

c. Which supplier would you choose?

d. If you could use both suppliers, how would you structure your orders?