Southwood Furniture Company is a U.S.-based furniture manufacturer that offshore

Question

Southwood Furniture Company is a U.S.-based furniture manufacturer that offshored all of its actual manufacturing operations to China about a decade ago. It set up a distribution center in Hong Kong from which the company ships its items to the United States on container ships. The company learned early on that it could not rely on local Chinese freight forwarders to arrange for sufficient containers for the company's shipments, so it contracted to purchase containers from a Taiwanese manufacturer and then sell them to shipping companies at the U.S. ports the containers are shipped to. Southwood needs 715 containers each year. It costs $1200 to hold a container at its distribution center, and it costs $6000 to receive an order for the containers. Determine the optimal order size, minimum total annual inventory cost, number of annual orders, and time between orders.

Explanation / Answer

Optimal Order size = (2*Annual demand*ordering cost/holding cost)^0.5 = (2*715*6000/1200)^0.5 = 84.6

Minimum total annual inventory cost = ordering cost + inventory holding cost

Minimum total annual inventory cost = 715/84.6*6000 + 84.6/2*1200 = 101,469

Number of annual orders = 715/84.6 = 8.4

Time between orders = 365/8.4 = 43.4 days

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