Warehouse Parameters

Description Value
Capacity in pallets 1,850
Square feet 40,000
Rent ($/Sq ft per year) $3.75
Salary per:
Manager (1 in total) $30,000
Supervisor (4 in total) $12,000
Benefits (% applied to salary) 30%
 3PL Pricing
Description Value
Receiving cost/pallet1 $6.50
Shipping cost/replenishment2 $11.25
Avg. orders per week/per store 2.5

Storage cost/pallet per week3 Incremental quantity

Pallets on-hand (x) discount
x < 1000 $4.00
1000 ≤ x < 1200 $2.75
1200 ≤ x < 1400 $1.50
1400 ≤ x $0.75
1
includes cost to receive and putaway pallets
2
includes cost to pick, prep, and ship a replenishment (i.e., a store order)
3
weekly inventory snap-shot taken on Friday
 Current Weight Volume Units/
SKU KM Description Item Source (lbs) (Cubic ft) Pallet
2300105 BATERIA KY357 Batteries KEY 0.10 0.016 1,000
1609313 T.V. 25" SANYO TV Local 8.82 2.08 8
2780211 CONECTOR F-59 Cable/Connector KEY 0.01 0.043 350
1709786 TEL CEL SONY Z200 Cellphone KEY 0.60 0.13 128
6300612 PURIFICADOR DE AIRE Air Purifier KEY 8.08 1.36 8
1309034 KARAOKE JXOK5 Karaoke Machine Local 16.50 3.50 4
6509036 CALC.CIENT.SC OL153 Calculator Local 1.23 0.20 80
6109015 REGULADOR KOBLENZ BP1000 Surge Protector Local 0.96 0.08 200
4309113 TELEFONO ALAMBRICO GOND Telephone Local 1.50 0.14 115
2000234 RADIO FM YB400PE Radio KEY 3.00 0.16 100

General Lead Times/Replenishment (Days)

Annual Holding Cost Interest Rate 25.00% Asia 65
Asia (Std. 7
Ocean Freight OKC 14
$/Cubic ft $2.05 OKC (Std. 1.3
Local 3
US Shipping
$/lb (OKC to Border) $0.05 Mexico Shipping
$/lb (Borde $0.09
$/lb (Manza $0.12

Question 3
Cellphones incur the highest annual cost, followed by television
Karaoke machines have the lowest reorder point in all cases
Reorder points are the highest when sourcing from Asia
Reoder points are the highest for Batteries
Connector has the lowest total annual cost

Question 4

ITEM Best Source Annual Cost

Batteries Asia 11865.2
TV Mexico 178605.9
Cable/Connector Asia 4344.8
Cellphone Mexico 233908.3
Air Purifier US 163530.2
Karaoke Machine Mexico 39123.1
Calculator Mexico 13729.5
Surge Protector Asia 62681.0
Telephone US 64120.5
Radio Asia 65850.8
 837759.1

Question 5
Every source has its own competitive advantages, and the firm should try to optimize procurement
As monthly demand for the product increases, the Reorder point is also higher in the case of KEY Electronics
The total annual costs when different items are obtained from different sources is less than when sourcing from any
 Projected 2012
Std Dev
Local US Asia Service Mean of
Sales Base Unit Base Unit Base Unit Level Demand Demand
Price ($) Cost ($) Cost ($) Cost ($) Duty (Type 1) (Month) (Month) TUC_US
1.33 0.80 0.41 0.40 18% 0.98 1,800 250 0.6378
176.94 129.17 116.78 115.01 30% 0.98 115 95 153.1888
1.18 0.66 0.38 0.37 10% 0.90 675 85 0.5594
142.22 128.00 108.09 106.67 35% 0.98 152 69 146.1455
166.67 116.67 93.33 91.67 15% 0.95 125 45 108.6007
138.89 108.33 75.00 73.61 50% 0.95 30 16 114.9500
16.28 10.42 8.46 8.30 25% 0.95 108 65 10.8872
20.51 13.33 8.41 8.21 13% 0.95 540 270 9.7777
9.49 6.83 4.46 4.37 23% 0.98 910 334 5.8358
174.39 148.23 120.33 118.58 20% 0.95 38 17 144.9560

Order Costs (per SKU) 1 year 12 months

Asia $12.60 1 month 4 weeks Total Unit Cost => TUC
US $4.86 1 month 28 days
Local $0.28 1 week 7 days

Labeling
Cost per un $0.02
Cost per u $0.14
of KEY Electronics
when sourcing from any single source
 US Mexico

Total Total Total Total Total Total

Ordering Inventory Material Annual Ordering Inventory
EOQ_US Cost Cost Cost Cost TUC_M EOQ_M Cost Cost
1147.5 91.48 91.48 13776.5 13959.4 0.9400 226.9 26.658 26.658
18.7 358.37 358.37 211400.5 212117.3 129.3100 4.9 79.030 79.030
750.3 52.47 52.47 4531.1 4636.1 0.8000 150.6 15.060 15.060
22.0 402.42 402.42 266569.4 267374.2 128.1400 5.6 90.446 90.446
23.2 314.58 314.58 162901.1 163530.2 116.8100 5.4 78.310 78.310
11.0 158.55 158.55 41382.0 41699.1 108.4700 2.7 36.969 36.969
68.0 92.58 92.58 14109.8 14295.0 10.5600 16.6 21.886 21.886
160.5 196.19 196.19 63359.5 63751.9 13.4700 32.8 55.272 55.272
269.7 196.76 196.76 63726.9 64120.5 6.9700 59.2 51.613 51.613
11.1 200.39 200.39 66099.9 66500.7 148.3700 2.6 48.662 48.662
911984.4

Unit Cost => TUC

ico Asia

Total Total Total Total Total Total

Material Annual Ordering Inventory Material Annual
Cost Cost TUC_A EOQ_A Cost Cost Cost Cost
20304.0 20357.3 0.5368 2014.0 135.1 135.1 11594.9 11865.2
178447.8 178605.9 154.8554 29.971 580.2 580.2 213700.5 214860.8
6480.0 6510.1 0.5164 1257.479 81.2 81.2 4182.4 4344.8
233727.4 233908.3 144.3630 35.687 644.0 644.0 263318.1 264606.1
175215.0 175371.6 109.1981 37.211 507.9 507.9 163797.2 164813.0
39049.2 39123.1 119.5900 17.419 260.4 260.4 43052.4 43573.2
13685.8 13729.5 10.9526 109.213 149.5 149.5 14194.6 14493.6
87285.6 87396.1 9.5765 261.165 312.6 312.6 62055.7 62681.0
76112.4 76215.6 5.8621 433.326 317.5 317.5 64014.1 64649.2
67656.7 67754.0 143.0040 17.928 320.5 320.5 65209.8 65850.8
898971.7 911737.5
 (i) When demand rate is stochastic, and lead time is
constant equal to the mean

Current Weight Volume Units/

SKU KM Description Item Source (lbs) (Cubic ft) Pallet
2300105 BATERIA KY357 Batteries KEY 0.10 0.016 1,000
1609313 T.V. 25" SANYO TV Local 8.82 2.08 8
2780211 CONECTOR F-59 Cable/Connector KEY 0.01 0.043 350
1709786 TEL CEL SONY Z200 Cellphone KEY 0.60 0.13 128
6300612 PURIFICADOR DE AIRE Air Purifier KEY 8.08 1.36 8
1309034 KARAOKE JXOK5 Karaoke Machine Local 16.50 3.50 4
6509036 CALC.CIENT.SC OL153 Calculator Local 1.23 0.20 80
6109015 REGULADOR KOBLENZ BP1000 Surge Protector Local 0.96 0.08 200
4309113 TELEFONO ALAMBRICO GOND Telephone Local 1.50 0.14 115
2000234 RADIO FM YB400PE Radio KEY 3.00 0.16 100

General Lead Times/Replenishment (Days)

Annual Holding Cost Interest Rate 25.00% Asia 65
Asia (Std. 7
Ocean Freight OKC 14
$/Cubic ft $2.05 OKC (Std. 1.3
Local 3
US Shipping
$/lb (OKC to Border) $0.05 Mexico Shipping
$/lb (Borde $0.09
$/lb (Manza $0.12
 Projected 2012 US
Std Dev
Local US Asia Service Mean of
Sales Base Unit Base Unit Base Unit Level Demand Demand
Price ($) Cost ($) Cost ($) Cost ($) Duty (Type 1) (Month) (Month) d_bar
1.33 0.80 0.41 0.40 18% 0.98 1,800 250 450.0000
176.94 129.17 116.78 115.01 30% 0.98 115 95 28.7500
1.18 0.66 0.38 0.37 10% 0.90 675 85 168.7500
142.22 128.00 108.09 106.67 35% 0.98 152 69 38.0000
166.67 116.67 93.33 91.67 15% 0.95 125 45 31.2500
138.89 108.33 75.00 73.61 50% 0.95 30 16 7.5000
16.28 10.42 8.46 8.30 25% 0.95 108 65 27.0000
20.51 13.33 8.41 8.21 13% 0.95 540 270 135.0000
9.49 6.83 4.46 4.37 23% 0.98 910 334 227.5000
174.39 148.23 120.33 118.58 20% 0.95 38 17 9.5000

Order Costs (per SKU) 1 year 12 months Reorder point, R = d_bar*LT+z*sq

Asia $12.60 1 month 4 weeks
US $4.86 1 month 28 days
Local $0.28 1 week 7 days

Labeling
Cost per un $0.02
Cost per u $0.14
 US Mexico

LT z sigma_d R d_bar LT z sigma_d R

2.0 2.05 62.50 1081.53 450.0000 0.429 2.0537 62.5 276.888
2.0 2.05 23.75 126.48 28.7500 0.429 2.0537 23.750 44.25317
2.0 1.28 21.25 376.01 168.7500 0.429 1.2816 21.250 90.14959
2.0 2.05 17.25 126.10 38.0000 0.429 2.0537 17.250 39.47824
2.0 1.64 11.25 88.67 31.2500 0.429 1.6449 11.250 25.50696
2.0 1.64 4.00 24.30 7.5000 0.429 1.6449 4.000 7.521524
2.0 1.64 16.25 91.80 27.0000 0.429 1.6449 16.250 29.06958
2.0 1.64 67.50 427.02 135.0000 0.429 1.6449 67.500 130.5418
2.0 2.05 83.50 697.52 227.5000 0.429 2.0537 83.500 209.7653
2.0 1.64 4.25 28.89 9.5000 0.429 1.6449 4.250 8.647869

order point, R = d_bar*LT+z*sqrt(LT*sigma_d)

 Asia

d_bar LT z sigma_d R
450.0000 9.286 2.0537 62.5 4569.714
28.7500 9.286 2.0537 23.750 415.5984
168.7500 9.286 1.2816 21.250 1649.95
38.0000 9.286 2.0537 17.250 460.8125
31.2500 9.286 1.6449 11.250 346.5667
7.5000 9.286 1.6449 4.000 89.69196
27.0000 9.286 1.6449 16.250 332.1638
135.0000 9.286 1.6449 67.500 1591.9
227.5000 9.286 2.0537 83.500 2635.066
9.5000 9.286 1.6449 4.250 109.5165
(iii) Both demand rate and lead times are random as described in the case.

Current Weight Volume Units/

SKU KM Description Item Source (lbs) (Cubic ft) Pallet
2300105 BATERIA KY357 Batteries KEY 0.10 0.016 1,000
1609313 T.V. 25" SANYO TV Local 8.82 2.08 8
2780211 CONECTOR F-59 Cable/Connector KEY 0.01 0.043 350
1709786 TEL CEL SONY Z200 Cellphone KEY 0.60 0.13 128
6300612 PURIFICADOR DE AIRE Air Purifier KEY 8.08 1.36 8
1309034 KARAOKE JXOK5 Karaoke Machine Local 16.50 3.50 4
6509036 CALC.CIENT.SC OL153 Calculator Local 1.23 0.20 80
6109015 REGULADOR KOBLENZ BP1000 Surge Protector Local 0.96 0.08 200
4309113 TELEFONO ALAMBRICO GOND Telephone Local 1.50 0.14 115
2000234 RADIO FM YB400PE Radio KEY 3.00 0.16 100

General Lead Times/Replenishment (Days)

Annual Holding Cost Interest Rate 25.00% Asia 65
Asia (Std. 7
Ocean Freight OKC 14
$/Cubic ft $2.05 OKC (Std. 1.3
Local 3
US Shipping
$/lb (OKC to Border) $0.05 Mexico Shipping
$/lb (Borde $0.09
$/lb (Manza $0.12
 Projected 2012
Std Dev
Local US Asia Service Mean of
Sales Base Unit Base Unit Base Unit Level Demand Demand
Price ($) Cost ($) Cost ($) Cost ($) Duty (Type 1) (Month) (Month) d_bar
1.33 0.80 0.41 0.40 18% 0.98 1,800 250 450.0000
176.94 129.17 116.78 115.01 30% 0.98 115 95 28.7500
1.18 0.66 0.38 0.37 10% 0.90 675 85 168.7500
142.22 128.00 108.09 106.67 35% 0.98 152 69 38.0000
166.67 116.67 93.33 91.67 15% 0.95 125 45 31.2500
138.89 108.33 75.00 73.61 50% 0.95 30 16 7.5000
16.28 10.42 8.46 8.30 25% 0.95 108 65 27.0000
20.51 13.33 8.41 8.21 13% 0.95 540 270 135.0000
9.49 6.83 4.46 4.37 23% 0.98 910 334 227.5000
174.39 148.23 120.33 118.58 20% 0.95 38 17 9.5000

Order Costs (per SKU) 1 year 12 months Reorder point, R = d_bar*LT_bar+

Asia $12.60 1 month 4 weeks
US $4.86 1 month 28 days
Local $0.28 1 week 7 days

Labeling
Cost per un $0.02
Cost per u $0.14
 US Mexico

LT_bar z sigma_d sigma_LT R d_bar LT_bar z sigma_d

2.0 2.05 62.50 0.19 1149.82 450.0000 0.429 2.05 62.50
2.0 2.05 23.75 0.19 127.35 28.7500 0.429 2.05 23.75
2.0 1.28 21.25 0.19 393.14 168.7500 0.429 1.28 21.25
2.0 2.05 17.25 0.19 128.16 38.0000 0.429 2.05 17.25
2.0 1.64 11.25 0.19 90.36 31.2500 0.429 1.64 11.25
2.0 1.64 4.00 0.19 24.58 7.5000 0.429 1.64 4.00
2.0 1.64 16.25 0.19 92.69 27.0000 0.429 1.64 16.25
2.0 1.64 67.50 0.19 432.34 135.0000 0.429 1.64 67.50
2.0 2.05 83.50 0.19 712.58 227.5000 0.429 2.05 83.50
2.0 1.64 4.25 0.19 29.30 9.5000 0.429 1.64 4.25

order point, R = d_bar*LT_bar+z*sqrt(LT_bar*(sigma_d)^2+(d_bar)^2*(sigma_LT)^2)

xico Asia

sigma_L sigma_L
T R d_bar LT_bar z sigma_d T R
0.00 276.89 450.0000 9.286 2.05 62.50 1.00 5182.12
0.00 44.25 28.7500 9.286 2.05 23.75 1.00 426.90
0.00 90.15 168.7500 9.286 1.28 21.25 1.00 1798.60
0.00 39.48 38.0000 9.286 2.05 17.25 1.00 486.07
0.00 25.51 31.2500 9.286 1.64 11.25 1.00 366.48
0.00 7.52 7.5000 9.286 1.64 4.00 1.00 93.18
0.00 29.07 27.0000 9.286 1.64 16.25 1.00 343.48
0.00 130.54 135.0000 9.286 1.64 67.50 1.00 1658.26
0.00 209.77 227.5000 9.286 2.05 83.50 1.00 2813.48
0.00 8.65 9.5000 9.286 1.64 4.25 1.00 114.63