Hartley Incorporated buys plastic resin by the ton and then packages and distributes it in smaller amounts to industrial users. The resin typically costs $50 per ton, and Hartley uses 80,000 tons each year. Placing an order for more resin costs $500 in allocated labor cost for purchasing personnel. Holding costs for the resin are estimated at 1 percent of the product value each month. Hartely operates 365 days a year.
How much resin should Hartley order each time?
What will be the average inventory and annual holding cost?
Suppose that instead of having each replenishment order delivered all in one shipment, Hartley asks its resin supplier to deliver each order in equally sized shipments, one shipment per day, with each shipment big enough to cover two days’ worth of demand. How will this affect Hartley’s order quantity, average inventory, and annual holding costs? (Hint: Realize in this second scenario that Hartley’s inventory level will never reach Q.)