QUESTION 2

A food company make their own sauce and one ingredient is the major component in the mixture and is ordered in 55-litre barrels from the supplier with a yearly usage rate of 900 barrels and with a standard deviation of daily demand of 0.5 barrels. Each order that is placed with the supplier costs €40 to process. Storage space is at a premium on the manufacturing floor and out in the yard, so their annual cost to hold inventory is €80 per barrel. The owner’s friend provides transportation services and his record is patchy, so lead time has averaged 6 days with a standard deviation of 3 days. The plant manager has set a 99% (z = 2.33) service level on the reorder point. The plant operates 365 days per year.

• What is the best order quantity?
• What is the total cost at this order quantity?
• What is the reorder point for this product?
• What is the cost of holding this safety stock?
• If the owners’ friend could improve his transportation services and could guarantee a lead time of five days, how much would this save the company per annum?
• An engineering firm has been supplying a customer with 10,000 wheel bearings each year. Setup costs for the wheel bearing is €40 and holding cost is €0.60 per wheel bearing per year. The firm can produce 500 wheel bearings per day to their just-in-time customer who require 50 bearings be shipped to it each business day.
• What is the optimal production quantity for the wheel bearings? (4 marks)
• What is the maximum number of wheel bearings that will be in inventory at the firm (2 marks)
• How many production runs of wheel bearings will they have each year? (2 marks)
• What is the total annual setup and holding costs for the wheel bearing?