Dee and Carol are owners of a company supplying tin cans to countries at war. Th

Question

Dee and Carol are owners of a company supplying tin cans to countries at war. This war tin company has had a history of lack of control, particularly in the production-inventory area. Both Dee and Carol expect to sell 900 cases of tin cans over the next year (300 days), but they are uncertain as to how they should procure and inventory the cans.

Dee prefers to order the cans from an outside supplier where he can obtain them at $50.00 a case to be delivered within 2 days of an order. He estimates ordering cost at $20.00/order. Annual carrying charges include 15% interest charge along with insurance and taxes that amount to $2.50 per unit of average inventory (these are two separate costs).

Carol prefers to produce the cans internally. She claims that the company has the capacity to produce 6 cases a day. The setup cost (ordering) and carrying costs remain the same as if the cans were purchased outside.

a. What would be the inventory policy if Dee’s scheme is followed?

b. What would be the inventory policy if Carol’s scheme is followed?

c. Which would you recommend and why?

d. Suppose Dee finds a dealer that will give him a 2% discount if he orders more than 900 cases at a time. Would your recommendation change? Explain.

e. Suppose that Carol wants to investigate the possibility of backordering cases of cans. She estimates that the stockout cost would be only $.50 per case per year. What is Carol’s optimal inventory policy in this case?

f. What is your final suggestion to Dee and Carol concerning the inventory policy that they should adopt? Why?

Illustrate each of the above inventory policies with the appropriate diagrams.

Explanation / Answer

a.

If Dee’s policies are followed then there will be a major loss of the company growth as the cost of per case and ordering of case are comparatively more than the after production profit. So the inventory policies are not desirable for Dee’s to sustain a good business in the company.

b.

Carol’s policies are comparatively good for company growth and the estimations that are made by her are quite effective to sustain a good business. Her idea to produce cans internally will reduce the per case estimation cost in ordering the cans from the suppliers. The idea will work and the company will be benefited from it.

c.

Carol’s inventory policies are requiring to be furnished in the company. As ordering cans from the suppliers will take an extra cost of and other charges are also will be acquired like 15% interests rates which will bring the per cans cost more than the production cost. The production is necessary to be optimum than net profit, and then only it will bring the business for a longer time.

d.

No, instead of giving 2% discount still Dee’s inventory policy will not sustain as because the interest rates are quite higher and per can the supplier is charging ordering cost of $20.00/order which is not desirable to make a profit in the business. With the 2% discount rates, the profit will come equally to production or more than profit. So it is not acceptable.  

e.

Carol’s inventory policy is quite good as per Dee’s. If the cans are produced internally then the cost will be less and profit will be more. Her estimation policy will work but Carol should ensure that the process of workflow should not be slower as compared to the working standard of the organization and if the regular workflow with the good supply chain is made then it is obviously the policy will work in the organization.

f.

Dee should think about the more profit in the company than to spend a huge sum of amount in production, this will not only run the company at a great loss it will also bring the business process to sustain growth in the organization.

Carol idea and perception of doing business are quite well; she should follow up the supply chain the organization as because low-cost estimation should not bring the business process slower. It will drop down the business for loss of supply. It is required to be balanced properly.   

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