Case Study

You have been hired as a consultant by the Government to help identify "efficiencies". One
potential area of cost reduction is to centralize the procurement of basic supplies across multiple
school boards. Prior to conducting a detailed investigation of cost savings, you have been asked
to prepare a report to illustrate potential benefits by focusing on a single commodity.

One basic commodity that is procured by the individual boards is copy paper. This is a high use
item and the usage and procurement details for each board are as follows (assume that the school
year is 12 months and usage is relatively constant).  The unit price of a box of paper is $60 and
the annual holding cost for a box is $2.

Write a report for the government detailing your analysis and procurement recommendations. 
Clearly state all assumptions.  If it was known that the lead time was 1 week, would this change
your conclusion (consider fixed cost and order process)?

Results

Based on the analysis done on the copy paper usage by School Boards, we can see that the Total
Annual Cost now is $1,707,000.00 with the total annual usage of 27600 boxes of paper. The total
Annual Holding Cost is $5,200.00, the total Annual Fixed Cost is $45,800.00 and the Annual
Cost of Procured Materials is $1,656,000.00. (See appendix 1).

Conclusions and Recommendations

We recommend that the school boards order, approximately:

School Board A: 2250 boxes every 2.5 months.

School Board B: 1385 boxes every 1.7 months.

School Board C: 1800 boxes every 3 months.

School Board D: 2190 boxes every 2.1 months.

School Board E: 2940 boxes every 2.4 months.

School Board F: 692 boxes every 1.7 months.

School Board G: 1550 boxes every 1.5 months.

If we increase the order quantity made by each school board, we can reduce the total annual cost
from $1,707,000.00 to $1,682,014.84, it is $24,985.16 in savings per year.

We notice that the fixed order cost does not vary accordingly with the order quantity. A few
school boards are ordering more boxes and paying higher fixed order costs than other boards that
have been ordered less quantities, for example. So, for the reduction of $24,985.16 we have
assumed that the fixed order cost did not change with the quantity ordered increased.
We can centralize the orders and reduce the annual fixed order cost ordering paper boxes from
the same supplier that supplies the school board F if the fixed order cost is constant
independently of the quantity ordered. So, the total annual cost savings would be $32,351.31.

If the lead time were 1 week, we would have costs incurred b the holding cost per unit which
would consequently increase he total annual cost. We must always calculate the costs related
with the fixed order and with the holding to have the minimum total annual cost.