Harley Davidson purchases components from three suppliers. Components purchased

Question

Harley Davidson purchases components from three suppliers. Components purchased from Supplier A are priced at $ 5 each and used at the rate of 206700 units per year. Components purchased from Supplier B are priced at $ 4 each and are used at the rate of 25,000 units per year. Components purchased from Supplier C are priced at $ 5 each and used at the rate of 10,000 units per year. Currently Harley purchases a separate truckload from each supplier. As part of its JIT drive, Harley has decided to aggregate purchases from the three suppliers. The trucking company charges a fixed cost of $ 400 for the truck with an additional charge of $100 for each stop. Thus, if Harley asks for a pickup from only one supplier, the trucking company charges $ 500; from two suppliers it charges $ 600; and from three suppliers it charges $ 700. Harley incurs a holding cost of 20% (of the price) for each component.

-What is the minimal annual inventory cost of the new aggregate replenishment strategy

Explanation / Answer

What is the minimal annual inventory cost of the new aggregate replenishment strategy

Solution - As we know the minimal annual inventory cost will be sum of the total Cost of Inventory Purchased Plus other Cost like Carrying Cost and Ordering Cost - Here the Ordering Cost will be the Transportation Cost for truck

We have been given the Inventory Cost per annum ( Units X Rates ) we need to find our Carrying Cost and Ordering Cost - Here if we order Trucking Company to pick up Orders from all the three Suppliers we will be saving the most and thus we will be paying minimum compare to 500 each we will pay 700 for all three orders if taken together- Thus we need to find the Economic Order quantity of each Supplier and have to clubb them together for pick up only then we will be paying the miminum. EOQ gives us what should be the Quantity to be ordered so that we have mimimum Carrying Cost plus we meet the demand of the Supply ans thus Dividing Annual Quantity by EOQ we get to know that How many times in the year we will have to order . Then we multiply ordering cost per time by Number of orders required yearly thus we get the annual Ordering Cost . For yearly Carrying Cost we divide EOQ by 2 and multiply by Carrying Cost per unit to arrive at annual Carrying Cost -

Please note -
At EOQ the Carrying Cost and Ordering Cost becomes equal and this is the most Optimul Ordering Activity where the Cost is Minimum

Allocation of Ordering Cost for Truck has been made in Proportion of the Units

Thus Below is the Calculation of Carrying Cost of the new aggregate replenishment strategy

Particulars A B C Total ($) A Annual Units 206700.00 25000.00 10000.00 241700.00 B Price Per Unit 5.00 4.00 5.00 C Inventory Cost ( A X B ) 1033500.00 100000.00 50000.00 1183500.00 d Carrying Cost % price Per unit 20.00% 20.00% 20.00% D Carrying Cost Per Unit (B X d) 1.00 0.80 1.00 E Cost of Placing Order 598.63 72.40 28.96 700.00 Q EOQ = Sqare Root(2AE/D) 15731.36 2127.26 761.07 18619.69 I Minimal annual inventory cost = C+(A/Q)*E+(Q/2)*D 1049231.36 101701.81 50761.07 1201694.24

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