Assignment:
Stereo & Electronic manufactures stereo equipment. For different parts needed in a stereo, S&E has the option of either producing it in the in-house facility or buying it from outside. S&E is trying to decide what policy to follow for one such component. The outside supplier has a lead-time of 35 days and the mean demand for the part during that lead-time is 700 units. The different costs associated with production and outside ordering are summarized below.
Production: Annual production rate = 9000 units. Set up cost = $100/set up. Unit cost of the product = $18.
Outside: Ordering cost = $90/order, Unit cost of the product = $20.
Assume the annual holding cost to be 25% of the unit cost of the product and 250 days of operation per year in both the cases.
Q1. What is the total annual demand? (Hint: What is the demand for 35 days? For 250 days?)
Q2. What is the economic production lot size and what is the EOQ for production and purchase options respectively?
Q3. What are the number of production runs and number of orders in a year for the production and purchase scenario respectively?
Q4. When buying from outside, what is the reorder point in terms of total inventory position? What will be its value if we express it as inventory on hand?
Q5. What is your recommendation for S&E, in-house production or purchasing? The objective is to minimize the cost. Show all the calculations clearly.
Q6. If the standard deviation of the demand during the lead time is 100 units and the management does not want more than 1 stockout per year, then what should be the revised reorder point when purchasing from outside in terms of total inventory position? What is it in terms of inventory on hand?
Q7. What is the amount of safety stock?