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J&G Distributors Case Analysis

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PART #4915082 An Inexpensive Part

Annual Demand = 60, 000 units
Demand rate during the lead time (D) = 2400 units in 2 weeks
Lead Time (LT) = 2 weeks
Probability of demand greater than 2400 units during the lead time = 0.5
S. No.| Expected Deviation (Ei) | Probability of occurrence, (Pi)
ValueEi2 * Pi |
1

| 500 | = 0.5 * 0.5 = 0.25

| 62500

| 750 | = 0.5 * 0.25 = 0.125

| 70312.5

| 1000| = 0.5* 0.15 = 0.075

| 75000

| 1200| = 0.5 * 0.1 = 0.05

| 72000

| Expected

SD = 528.9731

Safety Stock (SS)

= z*SD*LT
= 1.65 * 528.9731 * 1
= 873 units

(z corresponding to a service level of 95% is 1.65)

Reorder point (R)

= D*LT+z*SD*LT
= 2400*1 + 872.81 (LT is considered to be 1 because D=2400 and variations are
considered w.r.t the entire Lead time)
= 3273 units
Economic Order Quantity, Q*
= 2*D*CoCh
= (2*60000*10)(0.25*0.12)
= 6325 units
Average inventory = (Q*/2) + Safety Stock = (3163 + 873) units = 4036 units

OBSERVATIONS
* The company is currently carrying an excess average inventory = 6515
4036 = 2479 units, which is increasing the holding cost also.
Excess Holding Cost
* There is a trade off between the level of service and the inventory. A high
level of service (say 99%) calls for higher inventory stock which increases the
Reorder point and the inventory holding cost. The increased Reorder point will
lead to more frequent orders which will lead to more ordering cost.
* The value of service is judged by percentage of products available on the
shelf and the percentage of orders shipped as soon as the order is received. If
the company wants to increase the percentage of products available on the
shelf, then it has to keep the inventory of the parts which it is not carrying now.
These parts may be non- frequently moving parts. Keeping these parts will lead
to tying up of capital for a longer period of time, which increases the inventory
holding cost on the expense of higher level of service.
Value of capital tied up in inventory
= Inventory * Cost price
= 6515*0.12
= $ 781.8 on an average throughout the year (existing practice)
* The company should work for pre-specified level of limit of service, as it is
working in very competitive environment and many distributors are selling the
same components. If the service level is not high, i.e. the component is not
available on the shelf then the customer will go to other distributor and the

company will lose the sales. Therefore a minimum level of service is to be

maintained to enable the customers buying from the company at the exiting
satisfaction level.

MAKE/BUY
| MAKE
Demand (units)

| BUY |
| 1000| 1000|

Wrap cost by supplier ($/unit)

| 0.4

Material, Labour + Amortization cost ($/unit) | 0.4

M/c Setup cost
Total Cost

| 40

| 440 | 400 |

So it is not justified to wrap the component as it cost $40 for the batch
processing as compared to buying the wrapped component from outside.

QUANTITY DISCOUNTS - CONNECTORS

Annual Demand for Connectors, D = 10,000 units
Ordering Cost, Co = $ 10
Holding Cost = 0.25 per dollar of inventory
There are 2 vendors who provide Quantity Discounts
VENDOR 1
S. No.| Order Size | Unit Price

| Q*

| Adjusted Q*

| <=100

|5

| 101 - 500

| 4.75 | 411 | 411 | 47987.34025

| 501 - 1000 | 4.5

| 422 | 501 | 45481.4133

| >=1001

| 448 | 1001| 40600.4001

|4

| 400 | 100 | 51062.5

| TC

|
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It will be economical to order 1001 units every time. Total cost incurred over the
year is least for order size 1001.
VENDOR 2

S. No.| Order Size (Q)

| Unit Price
Q* Order Size
| Total Cost |
1

| <=100

| 101 to 500 | (25 + 4.75*Q)/Q

| 501 to 1000

4
| >=1001
43714.43052

|5

| Q*

| 400 | 100 | 5

| 51062.5

| 768 | 500 | 4.8

| (150 + 4.5*Q)/Q

| (650 + 4*Q)/Q
|

| Adjusted Q*

| Unit Price for

|
| 48500

| 1687| 1000| 4.65 | 47181.25

| 3634| 3634| 4.178866263

For Vendor 2, Order Size of 3634 would turn out to be economical.

When compared with Vendor 2 and corresponding Order Sizes, Ordering 1001
units from Vendor 1 is most economical.

Hence EOQ = Q* = 1001.

At EOQ, Price per unit, P = $ 4
Total Ordering Cost
= ($10) * (D/Q*) = ($10) * (10,000/1001)
= $ 99.9001 per annum
Total Holding Cost
= (Q*/2)* Price per unit * Cost of Capital = (1001/2)* ($4) * 0.25
= $ 500.5 per annum

Inventory Cost = $ 40,000

Total Cost
= $99.9001 + $500.5 + $40,000
= $40,600.4001 per annum

Several Items Ordered together

Let the parts be A (1000 units), B (1000 units) and C (500 units).
Holding Cost, CH= 0.25 of unit cost

Case 1:- Overseas Supplier

Ordering cost, CO = $ 10+ $ 400 per shipment= $ 410
Unit cost for A= $ 10
Unit cost for B= $ 10
Unit cost for C= $ 30
Demand variance: Part A= 100,
Part B= 100 and
Part C= 81

Since the ratios in which the parts are ordered are 2:2:1
Average cost= (10*2+10*2+30*1)/5= $ 14
Applying the formula for EOQ, Q*
= 2*D*CoCh
= 2*1000+1000+500*4100.25*14
= 766 units

Total Cost (TC)

= D*P + D/Q*Co + Q/2*CH
= (2000*10+500*30) + (2500/766)*410 + 766/2* 0.25*14
= $ 36351.52

Reorder point, R= DL +z
Calculating the average weekly demand as:
d1 (A) =1000/52 =19.23 units
d2 (B) =1000/52 =19.23 units
d3 (C) =500/52 =9.61 units
Lead time L=6 weeks,

Assuming confidence level of 95%,

Z= 1.65
(d1)=100 per week, (L1) = sqrt (6*100) = 24.5
(d2) =100 per week, (L2)= sqrt (6*100) = 24.5
(d3) =81 per week, (L3) = sqrt (6*81) = 22.05

Reorder Point,
R (A) = 19.23*6+1.65* 24.5 = 155.805 units= 156 units
R (B) = 19.23*6+1.65* 24.5= 155.805 units= 156 units
R (C) = 9.61*6+1.65* 22.05 = 94.04 units= 95 units

Case 2:- Domestic Supplier

Ordering cost, CO= $ 10
Unit cost for A= $ 11
Unit cost for B= $ 11
Unit cost for C= $ 31
Demand variance: Part A= 100,
Part B= 100 and
Part C= 81

Since the ratios in which the parts are ordered are 2:2:1
Therefore, Average cost= (11*2+11*2+31*1)/5= $ 15

Applying the formula for EOQ,

EOQ= 115.47 units= 116 units (Calculated using the EOQ formula)

Total Cost
= DC+ D/Q*Co + Q/2*CH
= (2000*11+500*31) + (2500/116)*10 + 116/2* 0.25*15
= $ 37933.01

Reorder point, R= dL+z

Calculating the average weekly demand as:
d1(A) =1000/52 =19.23 units
d2(B) =1000/52 =19.23 units
d3(C) =500/52 =9.61 units

Lead time L=1 week,

Assuming confidence level of 95%,

Z= 1.65
(d1)=100 per week, (L1) = sqrt (1*100) = 10
(d2) =100 per week, (L2)= sqrt (1*100) = 10
(d3) =81 per week, (L3) = sqrt (1*81)

=9

Reorder Point,
RD(A) = 19.23+1.65* 10 = 35.73 units= 36 units
RD(B) = 19.23+1.65* 10 = 35.73 units= 36 units
RD(C) = 9.61+1.65* 9 = 24.46 units= 25 units

Hence difference in Total Cost (TC)

= TCD TCO
= $ 37933.01- $ 36351.52
= $ 1581.49

Hence if Demand is higher, it will be profitable to go with overseas supplier. In

situations where demand is less, it will be profitable to go with domestic supplier.