Question

Minions is an online retailer of health supplements. Demand for vitamins is 2,000 bottles per month.

Minions incurs a fixed order placement, transportation, and receiving cost of $200 each time it places an order for vitamins with the manufacturer.

Minions incurs a holding cost of 20 percent. The manufacturer charges $3 for each bottle of vitamins purchased.
Each time Minions places an order, the manufacturer must process, pack, and ship the order.

The manufacturer has a line packing bottles at a steady rate that matches demand. The manufacturer incurs a fixed-order filling cost of $250, production cost of $2 per bottle, and a holding cost of 10 percent.
a) Compute the optimal order quantity and total annual cost (annual order cost + annual holding cost) for Minions

b) What is the total annual cost (annual fulfillment and annual holding cost) incurred by the manufacturing as a result of Minions’ ordering policy

c) Assume that the total supply chain cost = annual cost for Minions + annual cost for the manufacturer. Compute the optimal order quantity that minimizes the total supply chain cost Compute the total supply chain cost of the optimal policy.

Answer 1

Minion						(A)
Demand/Month		2000		Annual demand	24000			EOQ	Squreroot( 2* 24000* 200/0.6)=	4,000.00
Ordering Cost		200						No of order per year=	Annual Demand/EOQ	6.00
Holding Cost		20%	0.6					Annual Holding cost=	Holding Cost*Annual Demand	14,400.00
Charges per bottle		3						Annual ordering cost=	No of order per year*Ordering Cost	1,200.00
							Annual Holding cost+Annual Ordering Cost			15,600.00
							Total cost		15600+3*24000	87,600.00
Manufacture						(B)	No of order received per year			6.00
Fixed cost		250					Order Quantity			4,000.00
Variable cost		2					Annual Quantity			24,000.00
holding Cost		10%					Annual Production Cost
								Fixed cost	250*6	1,500.00
								Variable cost	24000*2	48,000.00
							Total Fulfilling/Production cost	FC+VC	1500+48000	49,500.00
							Annual Holding Cost		10% * Total production cost	4,950.00
							Total Cost		49500+4950	54,450.00
						( C )	Current Total Supply chain cost		87600+54450	1,42,050.00
Combined Supply chain cost
Ordering cost		450						NEW EOQ	Squareroot( 2*24000*450/(15%*3)	6,928.20
Avg Holding cost		15%
							New EOQ ALL COST
							Minion
								No of order per year=	Annual Demand/EOQ	3.46
								Annual Holding cost=	Holding Cost*Annual Demand	14,400.00
								Annual ordering cost=	No of order per year*Ordering Cost	692.82
							Annual Holding cost+Annual Ordering Cost			15,092.82
							Total cost		15600+3*24000	87,092.82
							Manufacture
							No of order received per year			3.46
							Order Quantity			6,928.20
							Annual Quantity			24,000.00
							Annual Production Cost
								Fixed cost	250*3.46	866.03
								Variable cost	24000*2	48,000.00
							Total Fulfilling/Production cost	FC+VC	1500+48000	48,866.03
							Annual Holding Cost		10% * Total production cost	4,886.60
							Total Cost		49500+4950	53,752.63
							NEW POLICY Total Supply chain cost			1,40,845.45
							New policy reduce order cost for minion and fixed cost for manufacture, while holding and other cost are same