Scenario 1 –Robert Morris Health Robert Morris Health (RMH) is a 9-hospital inte
ID: 356158 • Letter: S
Question
Scenario 1 –Robert Morris Health
Robert Morris Health (RMH) is a 9-hospital integrated delivery network based in the Pittsburgh area in the United States. Currently each hospital orders its own supplies and managesthe inventory. A common item used is a sterile Intravenous (IV) Starter Kit. Weeklydemand for the IV Starter Kit is 600 units. (We assume that one year is 52 weeks.) The unit cost of an IV Starter Kit is $1.50. Robert Morris has estimated that the physical holding cost (operating and storage costs) ofone unit of medical supply is about 6 percent per year. In addition, the hospital network'sannual cost of capital is 12 percent. Each hospital incurs a fixed order cost of$150 whenever it places an order, regardless of the order size. The supplier takes one week to deliver the order. Currently, each hospital places an order of 6,000 units of theIV Starter Kit whenever it orders. Robert Morris has recently been concerned about the levelof inventories held in each of the hospitals and is exploring strategies to reduce them.
The director of materials management is considering the following options:
1) Increase the frequency of ordering by reducing the current order size
2) Centralize the order process across all 9 hospitals and perhaps serving all thehospitals from a single warehouse
1.1 (1 point) What is the economic order quantity? Answer: Q* = units/order.
1.2 (1 point) What is the economic-like order quantity Q# in a multiple of 500?
Answer: Q# = units/order.
1.3 (2 points) Compare the total annual costs of one Robert Morris hospital at the economic order quantity Q* and at the economic-like order quantity Q# in a multiple of 500 units?
Answer:
Order Cost
Holding Cost
Material Cost
Total annual cost
Q*
Q#
1.4 (2 points) Compare the total annual order and holding costs and the inventories across all the Robert Morris hospitals at their economic order quantities before and after centralization.
Answer:
Total annual cost (across all hospitals)
Order and Holding Costs
Inventories
Before Centralization
After Centralization
Scenario 1 –Robert Morris Health (Continued)
The manufacturer of IV Starter Kits uses the following all unit discount pricing schedule:
Order Quantity
Unit Price
0-4,999 (q0 = 0)
C0 = 1.50
5,000-9,999 (q1 = 5,000)
C1 = 1.40
10,000 or more (q2 = 10,000)
C2 = 1.30
(Assuming Before Centralization) Evaluate the number Q of IV Starter Kits that the manager of one hospital should order in each order as follows:
1.5 (3 points) Fill in the blanks for Qi’s and compute the order quantities and the total annual costs for the prices Ci. (Table for to fill in on the next page.)
1.6 (2 points) Fill in the blanks for Qi’s and compute the order quantities and the total annual costs for the prices Ci.
1.7 (1 point) What is the optimal order quantity Q*? Answer: .
Order Cost
Holding Cost
Material Cost
Total annual cost
Q*
Q#
Explanation / Answer
Annual demand, D = 600*52 = 31200
Setup cost, S = $ 150
Holding cost rate = operating and storage cost + cost of capital = 6%+12% = 18%
Holding cost, H = Unit cost * holding cost rate = 1.5*18% = $ 0.27
1.1 Economic Order Quantity, Q* = SQRT(2DS/H) = SQRT(2*31200*150/0.27) = 5888 units/order
1.2 Evaluate the total annual cost with Q=5500 and 6000
Total annual cost with (Q=5500) = (5500/2)*0.27+(31200/5500)*150 = 1593
Total annual cost with (Q=6000) = (6000/2)*0.27+(31200/6000)*150 = 1590 it is lesser.
Therefore, EOQ in multiples of 500 = 6000 units/order
1.3
1.4 After centralization, Annual demand across all 9 hospitals, D = 31200*9 = 280800
EOQ = SQRT(2*280800*150/0.27) = 17664
Order Cost Holding Cost Material Cost Total annual cost Q* =(31200/5888)*150 = 795 =(5888/2)*0.27 = 795 =1.5*31200 = 46800 =795+795+46800 = 48390 Q# =(31200/6000)*150 = 780 =(6000/2)*0.27 = 810 =1.5*31200 = 46800 =780+810+46800 = 48390Related Questions
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