An online printing company is in the inventory planning process for the upcoming year. Specifically, they are deciding how to plan orders for a particular kind of card stock that is frequently used to print invitations. The printing company has usage data by quarter for this card stock and determined that every quarter, they use 12,000 boxes of card stock. We know that with the company’s current supplier, they are charged $2 per card stock box and placing/processing this order results in a cost of $200/order. In addition, because this card stock must be kept in a humidity controlled warehouse, it costs $1 per box of card stock to maintain per year (regardless of the value of the card stock).
a. With this current supplier and assuming a continuous review inventory model, what should the company’s order size be for boxes of card stock?
b. How many days of inventory would the company be carrying? (assume a 365 day year) The online printing company has just identified a new supplier that offers a quantity discount schedule for orders of boxes of card stock. Given that the card stock is not perishable, they are considering switching to this supplier. Although their cost to place an order and holding cost would remain the same, this supplier offers the following discount menu:
Purchases under 4,000 units have a cost per unit of $2
Purchases from 4,000 units to 9,999 units receive a discount of 5%/unit
Purchases from 10,000 units to 19,999 units receive an additional discount of 5%/unit (from the previous level of purchase)
Purchases 20,000 units or more receive an additional discount of 5%/unit (from the previous level of purchase)
c. If the printing company decides to use this supplier and still uses a continuous review model, what would their order size be so that overall costs are minimized?
d. How many days of inventory would the company be carrying? (assume a 365 day year)
e. Which supplier should they do business with if they want to lowest cost possible?
f. How would using the first supplier versus the quantity discount supplier impact their storage warehouse? (e.g., what maximum level of inventory should they be prepared for? Will they have to redesign if they switch suppliers? How many times a year would they need to have employees staffed for unloading shipments?)
g. This product, purchased from either supplier, is shipped by boat from China and therefore has a long lead time of 2 months. Comparing the first supplier with the quantity discount supplier, comment on the connection between this lead time and the days of inventory held.
