Harley purchases components from three suppliers. Components purchased from Supp

Question

Harley purchases components from three suppliers. Components purchased from Supplier A are priced at $5 each and used at the rate of 20,000 units per month. Components purchased from Supplier B are priced at $4 each and are used at the rate of 2,500 units per month. Components purchased from Supplier C are priced at $5 each and used at the rate of 900 units per month. 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. Assume a holding cost of 20 percent per year.

a) Suggest a replenishment strategy for Harley that minimizes annual cost.

b) Compare the cost of your strategy with Harley’s current strategy of ordering separately from each supplier.

Explanation / Answer

1a- I will suggest EOQ method of inventory planning because it will balance ordering cost and carrying cost, hence it will provide the lowest cost replenishment order quantity.Let's calculate the EOQ of each componet

Supplier-A- ? (2*12*20,000*500/1)=  ? 240,000,000= 15,491. Total numbers of orders in a year=12*20,000/15,491=15 orders

Supplier B=  ? 2*12*2500*500/0.8=  ? 37,500,000= 6124. Total numbers of orders in a year= 12*2500/6124= 5 orders

Supplier C=  ? 2*12*900*500/1=  ? 10,800,000=3286. Total number of orders in a year= 12*900/3286=3 orders

b- Cost of ordring and holding in my strategy= 700*3+600*2+500*10+15,491/2*1+6124/2*0.8+3286/2*1

= 2100+1200+5000+7745.5+2449.6+1643 =20,138

Cost of ordering and holding with Harley's strategy= 12*500+12*500+12*500+20,000/2*1+2500/2*0.8+900/2

= 6,000+6,000+6,000+10,000+1000+450= 29,450

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