harley davidson purchases components from three suppliers: a. Supplier A - item

Question

harley davidson purchases components from three suppliers:

a. Supplier A - item cost $5 with a demand of 20,000 per month

b. Supplier B - item cost $4 with a demand of 2500 per month

c. Supplier C - item cost $5 with a demand of 900 per month

d. Holding cost for all items is 20%

e. The trucking company charges a fixed cost of $400 per truck with $100 for each stop

f. Current practice is separate truckloads per supplier. HD is interested in JIT so is considering supply order aggregation.

g. syggest a replenishment strategy for HD that minimizes annual cost. Compare that to HD's current strategy of seperate orderes from each supplier

Explanation / Answer

HD's current strategy:

1. Item cost for Supplier A = 5*20000 = $100000

2. Item cost for Supplier B = 4*2500 = $10000

3. Item cost for Supplier C = 5*900 = $4500

4. Holding cost = 0.2*(100000+10000+4500)

= $22900

5. Transportation cost = 400*3 = $1200

Annual cost = 100000 + 10000 +4500 + 22900 + 1200

= $138600

Replenishment strategy for HD:

1. Item cost for Supplier A = 5*20000 = $100000

2. Item cost for Supplier B = 4*2500 = $10000

3. Item cost for Supplier C = 5*900 = $4500

4. Transportation cost = 400 + 100*3

= $700

Annual cost = 100000 + 10000 + 4500 + 700

= $115200

Note: Holding cost has not been taken into account since HD's replenishment strategy is based on Just-in-time procurement wherein the items will not be stored in the warehouse and will only be procured when they are needed. Also transportation cost has reduced from $1200 to $700 because order consolidation has been done, i.e. orders are picked up from 3 suppliers simultaneously rather than picking separate orders through different trucks which costs more.

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