Dee and Carol are owners of a company supplying tin cans to countries at war. This war tin company has had a history of lack of control, particularly in the production-inventory area. Both Dee and Carol expect to sell 900 cases of tin cans over the next year (300 days), but they are uncertain as to how they should procure and inventory the cans.
Dee prefers to order the cans from an outside supplier where he can obtain them at $50.00 a case to be delivered within 2 days of an order. He estimates ordering cost at $20.00/order. Annual carrying charges include 15% interest charge along with insurance and taxes that amount to $2.50 per unit of average inventory (these are two separate costs).
Carol prefers to produce the cans internally. She claims that the company has the capacity to produce 6 cases a day. The setup cost (ordering) and carrying costs remain the same as if the cans were purchased outside.
a. What would be the inventory policy if Dee’s scheme is followed?
b. What would be the inventory policy if Carol’s scheme is followed?
c. Which would you recommend and why?
d. Suppose Dee finds a dealer that will give him a 2% discount if he orders more than 900 cases at a time. Would your recommendation change? Explain.
e. Suppose that Carol wants to investigate the possibility of backordering cases of cans. She estimates that the stockout cost would be only $.50 per case per year. What is Carol’s optimal inventory policy in this case?
f. What is your final suggestion to Dee and Carol concerning the inventory policy that they should adopt? Why?
Illustrate each of the above inventory policies with the appropriate diagrams.