Nissan Motors has been producing a particular ignition box for its car engines. The Fabrication Department of the company has a monthly demand of 500 ignition boxes (Part #37822) with a weekly standard deviation of 80. The leadtime for this part is two weeks. For the purposes of this problem, you may assume that each month is exactly 4 weeks long. Nissan requires a 97% service level for this item.
In the Fabrication Department, 20 hours (with labor costs of $30 per hour) is allowed for each setup of Part #37822. The Accounting department has determined the variable cost per box of Part #37822 is $100, while the Finance Department requires a carrying cost of 25% per year of the value of any item in inventory. Order cost is $125/order.
The Fabrication Department is using a Fixed Quantity/Variable Interval inventory management system.
1) Determine how much they should order each time an order is placed.
2) Assume Nissan wanted a 99.9% service level for this item. Based on this managerial decision, what should the reorder point be? What does this information tell you?
3) Now assume Nissan wanted to change to using EOQ. Determine how much they should order each time an order is placed.
4) What happens to the order quantity when the setup cost is reduced to 15 hours? What is the new EOQ? What can you determine about the relationship between EOQ and item cost?
5) Using original parameters, what happens to the order quantity when the order cost increases to $150/order? What is the new EOQ? What is the relationship between order costs and EOQ?