A small electronics firm has appointed a new Operations Manager (OM) who goes

around exploring the aspects of the operations, and its inventory management
practices.

In her first week the new OM talked to everyone she could at the faci1ity and
gathered some data on a few representative parts. Markus estimated the cost of
capital at 0.25. He also provided her with an estimate of the total personnel
costs of the inventory control and receiving departments, excluding the salaries
of the inventory control and receiving department supervisors. This she divided
by the number of purchase orders processed in the previous year. This gave $9,
to which she added $1, which was Markus's estimated cost of paper. postal and
telephone charges for processing an order.

I.

MAKE-OR BUY (PACKAGING)

Although the company was only a distributor with no manufacturing capability,

some packaging equipment had been purchased a few years ago. One example is a
shrink-wrap machine. The machine purchase turned out to be a big mistake. The
machine required a changeover whenever a new part was processed. This often
took over an hour. It is usually more expensive to wrap in-house than to have
suppliers provide the items already wrapped. There were currently only 10 parts
processed on the machine. Hence, the machine was under utilized.
One such item is a pair of wire strippers with annual demand of 1,000 units. The
company purchased these items in bulk from a supplier in Taiwan, for $0.70 each.
The suppliers offered to shrink wrap the items before shipping, at an additional
cost of $0.40 each. The time required to set up the shrink-wrap machine was
valued at $40 (direct labor and materials). The per-unit cost is estimated to be
$0.10 in materials and direct labor and another $0.30 in machine amortization. As a
result, the unit cost of shrinkwrapping the item at the company itself was equal to
the cost to have the supplier do it. With the higher setup cost, the item was
purchased from the supplier already wrapped.
Comment on the decision. Which is the right decision to make or buy?

II.

SEVERAL ITEMS ORDERED TOGETHER

There are three items that are currently purchased from one overseas
supplier who charges a fixed cost of $400 per shipment. The estimated
annual demands for the three parts are 1000, 1000 and 500 units. The
corresponding unit costs are $10, $10 and $30. For some reason, these
parts had been tracked closely by one of the purchasing agents last year
and she had estimated the variance of demand per week for the three
parts as 100, 100 and 81. When one of these items reaches its reorder
point all three are ordered. The order quantity was set as the difference
between the amount in inventory and the EOQ. About six weeks later,
the items arrive.
These parts can also be purchased domestically from a supplier who
delivered the goods in one week and does not charge for delivery.
Although the unit costs are only $1 more (i.e. $11, $11 and $31 for the
three parts), the high annual demands make it more economical to
purchase from the overseas supplier.
1) Determine the EOQ.
2) Which is economical? The overseas supplier or local supplier?
3) Do the variances of demand influence the decision on EOQ?
4) If not, what is the application of determining the variances?
III.
AN INEXPENSIVE PART
A special resistor, is representative of the very inexpensive parts. It costs $0.12 from a very reliable
supplier who delivers the parts within 2 weeks of order receipt. Annual demand for the part is about
60,000 units. The demand fluctuated from day to day, with an average request from a single customer
of 500 Units. The demand during the lead time regularly deviated from the expected amount (60.000
units per year / 50 weeks per year * 2 week lead time = 2400). The actual demand during the lead
time was greater than 2400 about 50% of the time. When this occurred, the error was about 500 units
50% of the time, 750 units 25% of the time, 1000 units 15% of the time and 1200 units 10% of the
time. It had never exceeded 2,400 by more than 1,250 units. Over the last year, the average inventory
level for the part had been 6515 units.
The resistor is more or less a commodity item, and can be purchased from a variety of suppliers.