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 240,000 units per year. Components purchased from Supplier B are priced at $ 4 each and are used at the rate of 30,000 units per year. Components purchased from Supplier C are priced at $ 5 each and used at the rate of 10,800 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.

1.) What is the minimal annual inventory cost of the new aggregate replenishment strategy ?

2.) What is the minimal annual inventory cost of the Harley’s current strategy of ordering separately from each supplier ?

3.) How much is the saving resulted ?

SHOW WORK!!!

Explanation / Answer

1. As calculated above

New Aggregate strategy:

2.

Using the separate strategy

Total Inv cost =

3.

The resulted saving:

2-1 =

Formulae used Supplier A Supplier B Supplier C Separate total Aggregate D Demand Total 240000 30000 10800 280800 p Purchase cost 5.00 4.00 5.00 4.89 K Ordering cost 500 500 500 700 h Holding cost 1 0.8 1 0.9786 Working days 52 52 52 52 EOQ (Sqrt(2*k*D/h) 15491.93 6123.72 3286.34 20042.54 15492 6124 3286 20043 AI Average inventory 7746 3062 1643 10021 (AI*h) Holding cost 7745.97 2449.49 1643.17 9807.14 (p*AI) Purchasing cost for 410 items 38729.83 12247.45 8215.84 49035.70 No of orders 15.49 4.90 3.29 14.01 D*K/EOQ Toc Total ordering cost annualy 7745.97 2449.49 1643.17 11838.62 9807.14 EOQ*h/2 Thc Annual Holding cost 7745.97 2449.49 1643.17 11838.62 9807.14 Toc+Thc THOC Total Inv cost 15491.93 4898.98 3286.34 23677.25 19614.28 D*P Tpc Purchasing cost annual 1200000 120000 54000 1374000.00 1374000 Toc+Thc+Tpc TC Total cost 1215492 124899 57286 1397677.25 1393614 Length of order cycle 3.36 10.61 15.82 3.71

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