The XYZ Company recently hired an operations manager, Bob, to oversee operational activities. Bob’s duties include managing and controlling inventory and production. While examining the ordering policy for a specific component, Bob noticed that this current policy may be improved by applying various classical inventory models. Alex, the supervisor in charge of ordering this component, informed Bob that based on an annual demand of 2400 such components, it was decided to adopt the current policy of ordering 800 units every time an order is placed. Bob inquired about the various costs involved in purchasing the components and was told that the components can be purchased from a supplier at a unit purchasing cost of $45, the ordering cost is $300, and the holding cost is based on an annual holding cost rate of 20%. Alex also stated that the time it takes between placing and receiving the order is one month. Bob told Alex that these parameters must be used to determine the economic order quantity. Bob applied the classic EOQ model to obtain the optimal ordering policy and to assess the current policy.
The next day Alex informed Bob that it is possible to produce the components in-house at a production rate of 7200 units per year and at a unit production cost of $45. However, due to the high setup cost, upper management decided to purchase and not produce the product. Bob then applied the classic EPQ model to obtain the optimal production policy and compare it to the optimal ordering policy resulting from the EOQ model.
A week later, the supplier sent an email offering the following price discount schedule:
- Level 1. Quantity 1. Price
- 1 1. 1 to 299 1. $45
- 2 1. 300 to 499 $43
- 3 1. 500 to 2,999 $42
- 4 1. 3,000 or more $40
Bob then used the EOQ model with price discount to determine the new optimal policy based on the price discount offered by the supplier.
A month later, upper management informed Bob that the annual demand of 2400 units is just an expected demand since demand fluctuate from month to month according to a normal distribution with mean monthly demand of 200 units and standard deviation of 30 units. Bob was asked to reevaluate the ordering policy to make sure that a 95% service level is attained. Bob applied the continuous review model and submitted a detailed report with an updated optimal policy.
Your task is to reproduce Bob’s results when the classic EOQ and EPQ models are applied. In addition, reproduce the optimal policy based on the price discount offered by the supplier and another based on the continuous review model.
Submit a detailed report and show all calculation.