hapter 11-Managing Economies of Scale in a Supply Chain: Cycle Inventory

Problem 1

Transportation cost between two plants(S)= $1000

Number of motorcycles sold per day= 300

Number of motorcycles sold per year(D)= 300* 365=109,500

Cost of each engine (C) = $500

Holding cost(h)= 0.2

Optimal order quantity = (√ 2hCDS )

=sqrt( 2* 109500* 1000/0.2*500)

=1479.865

Number of engines that should be loaded onto each truck= 1480

Cycle inventory of engines at Harley= Q/2=1480/2 =740

Total annual cost TC = (D/Q)S + (Q/2)hC = (109,500/1480)*1000 + (1480/2)*0.2*500

= 73,986.48 + 74,000 =$147,986.48

Problem 2

Transportation cost between two plants(S)= $1000.

Number of engines loaded on to truck reduced to 100.

Number of orders placed in an year, n=D/Q= 109500/100= 1095

Total annual order cost =1095*1000= 1095000

Total holding cost= (Q/2)h*C =(100/2)* 0.2* 500= $ 5000

Total Annual cost=1095000+ 5000= $1,100,000

Q= (√ 2hCDS )
100 = sqrt( 2*109500*S/0.2*500)
100= sqrt(2190S)

10000=2190*S

Transport cost ;S=10000/2190= $ 4.566 = $4.57

Cost of each truck be if a load of 100 engines is to be optimal for Haley = $4.57.

By reducing the number of engines loaded on a truck to 100 , the annual inventory cost
increases from $147,985.48 to $1,110,000

Problem 10.

Separate orders from suppliers A, B, and C

DA = 20000*12= 240000 DB = 2,500*12= 30000 DC = 900*12 = 10800
S = $500 S = $500 S = $500
CA = $5 CB = $4 CC = $5
h = 0.2 h = 0.2 h = 0.2

Optimal order quantity for each product

QA = SQRT((2DAS)/(hCA)) = SQRT((2*24,0000*500)/(0.2*5)) = 15491.93=15,492
QB = SQRT((2DBS)/(hCB)) = SQRT((2*30000*500)/(0.2*4)) = 6123.72 = 6124
QC = SQRT((2DCS)/(hCC)) = SQRT((2*10800*500)/(0.2*5)) = 3286.33 = 3286
Cycle Inventory for A = QA/2 = 15492/2 =7746.
Cycle Inventory for B = QB/2 = 6124/2 =3062.
Cycle Inventory for A = QC/2 = 3286/2 =1643.

Annual ordering and holding cost for each product

TCA = (D/QA)S + (QA/2)hCA = 7745.93+7746 = 14591.93
TCB = (D/QB)S + (QB/2)hCB = 2449.37+ 2449.6 = 4898.97
TCC = (D/QC)S + (QC/2)hCC = 1643.33+ 1643 = 3286.33
Total cost
TC = TCA + TCB + TCC = 14591.93+ 4898.97+ 3286.33 = $23677.23
Joint order from suppliers A, B, and C

DA = 20000*12= 240,000 DB = 2,500*12= 30,000 DC = 900*12 = 10,800

S = $500 S = $500 S = $500
CA = $5 CB = $4 CC = $5
h = 0.2 h = 0.2 h = 0.2
S* = S + sA + sB + sC = 400 + 100 + 100 + 100 = 700
Optimal joint order frequency
n* = SQRT((DAhCA + DBhCB + DChCC)/(2S*))
=SQRT ((240000*0.2*5) + (30000*0.2*4) + (10800*0.2*5))/(2*700)
=14.01
Order Size corresponding to n*
QA = DA/n* = 240,000/14.01 = 17,130.62
QB = DB/n* = 30,000/14.01 = 2141.32
QC = DC/n* = 10,800/14.01 = 770.88
Holding Cost:
Holding cost for product from supplier A = ((QA/2)h*CA+ (QB/2)h*CB (QC/2)h*CC =
=((17,130.62/2)*0.2*5) + ((2,414.32/2)*0.2*4) + ((770.88/2)*0.2*5)
= $9807.28
Total order cost = n*S* = 14.01*700 = $9,807.
Total cost TC = total holding cost + total order cost = 9807.28+ 9807 = $19614.28

Hence, the difference of current and joint is 23677.23 – 19614.28 = $4062.95

Harley would save $4063 if they use suppliers jointly for ordering instead of ordering
separately.