Homework 7

Problem 1: An electronics company has two contract manufacturers in Asia: Foxconn assembles
its tablets and smart phones and Flextronics assembles its laptops. Monthly demand for tablets
and smartphones is 10,000 units, whereas that for laptops is 4,000. Tablets cost the company
$100, laptops cost $400, and the company has a holding cost of 25 percent. Currently the
company has to place separate orders with Foxconn and Flextronics and receives separate
shipments. The fixed cost of each shipment is $10,000. What is the optimal order size and order
frequency with each of Foxconn and Flextronics?

The company is thinking of combining all assembly with the same contract manufacturer. This
will allow for a single shipment of all products from Asia. If the fixed cost of each shipment
remains $10,000, what is the optimal order frequency and order size from the combined orders?
How much reduction in cycle inventory can the company expect as a result of combining orders
and shipments?

Problem 2: Harley purchases components from three suppliers. Components purchased from
Supplier A are priced at $5 each and used at the rate of 20,000 units per month. Components
purchased from Supplier B are priced at $4 each and are used at the rate of 2,500 units per
month. Components purchased from Supplier C are priced at $5 each and used at the rate of
900 units per month. Currently, Harley purchases a separate truckload from each supplier. As
part of its JIT drive, Harley has decided to aggregate purchases from the three suppliers. The
trucking company charges a fixed cost of $400 for the truck with an additional charge of $100
for each stop. Thus, if Harley asks for a pickup from only one supplier, the trucking company
charges $500; from two suppliers, it charges $600; and from three suppliers, it charges $700.
Suggest a replenishment strategy for Harley that minimizes annual cost. Assume a holding cost
of 20 percent per year. Compare the cost of your strategy with Harley’s current strategy of
ordering separately from each supplier. What is the cycle inventory of each component at
Harley?

Problem 3: A BMW dealership has k = 4 retail outlets serving the entire Chicago area
(disaggregate option). Weekly demand at each outlet is normally distributed, with a mean of D =
25 cars and a standard deviation of D = 5. The lead time for replenishment from the
manufacturer is L = 2 weeks. Each outlet covers a separate geographic area, and the correlation
of demand across any pair of areas is . The dealership is considering the possibility of replacing
the four outlets with a single large outlet (aggregate option). Assume that the demand in the
central outlet is the sum of the demand across all four areas. The dealership is targeting a CSL of
0.90.Compare the level of safety inventory needed in the two options as the correlation
coefficient for the following case:
Case 1:  = 0
Case 2:  = 0.8
Case 3:  = - 0.6