1. Bike Parts Emporium, a cycling warehouse, stocks a variety of parts that are sold at neighborhood stores. One particular part, a popular brand of brake cable, is purchased by the warehouse for $1.50 each. It is estimated that the cost of order processing and receipt is $100 per order. The company uses an inventory carrying charge based on a 28% annual interest rate.
The monthly demand for the cable follows a normal distribution with mean 28,000 and standard deviation 7,700. Order lead time is assumed to be five months with a standard deviation of lead time of 1.5 months. Assume that if a cable is demanded when the warehouse is out of stock, then the demand is back ordered. Assume cycle service level = 0.9876.
Calculate the safety stock for the cable, assuming they use a Q-system. (NOTE: Only calculate the safety stock for this question, not the reorder point) Round to the nearest unit.
2. Using the Bike Parts Emporium problem above:
Suppose that a new delivery company promises that every order will be delivered in exactly 5 months, guaranteed. Thus, there will be no variability in lead time for an order. For this improved service their contract will cost $15,000 more per year than your current delivery contract.
Calculate the net value to Bike Parts Emporium if they were to switch to the new contract with guaranteed delivery time. When entering your answer, enter it as money, that is with two decimal places, but with no dollar sign. Use a negative sign if it is appropriate.
HINT: Consider the following as an example: suppose a current contract has an operational cost of $50 per year and a contract cost to the supplier of $50 per year for a total cost of $100 per year. Suppose a new supplier proposes a new system with an operational cost of only $30 but a contract cost to them of $80 per year for a total cost of $110. The net value of switching to the new supplier would be -10; that is, you would lose $10 per year on the new contract.