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Operations Management Inventory Quantity Discounts

Please show your calculations and round to FOUR decimal places.

A retailer needs to choose between two suppliers for one of its products. The only criterion used for the decision is the cost. The following information about the product is available:

Demand 200 a week
Ordering cost (for all suppliers) $75 per order
Holding cost 20% of the unit cost
Working weeks 50 a year

The retailer has narrowed down the choices to two suppliers. The following shows the price-break schedule for each supplier:
SUPPLIER A SUPPLIER B
Quantity Unit Price Quantity Unit Price
1-299 $14.00 1-249 $14.10
300-699 13.80 250-449 13.90
700+ 13.60 450+ 13.70

A. Which supplier should the retailer choose? Explain and support your answer with appropriate calculations.
B. What is the optimal lot size for the item? (Note: There has to be only ONE choice, regardless of supplier).
C. What is the total annual cost of inventory for the chosen (best) lot size?

Solution Preview

Operations Management - Inventory Management Quantity Discount
Please show your calculations and round to FOUR decimal places.
A retailer needs to choose between two suppliers for one of its products. The only criterion used for the decision is the cost. The following information about the product is available:
Demand 200 a week
Ordering cost (for all suppliers) $75 per order
Holding cost 20% of the unit cost
Working weeks 50 a year
The retailer has narrowed down the choices to two suppliers. The following shows the price-break schedule for each supplier:
SUPPLIER A SUPPLIER B
Quantity Unit Price Quantity Unit Price
1-299 $14.00 1-249 $14.10
300-699 13.80 250-449 13.90
700+ 13.60 450+ 13.70
A. Which supplier should the retailer choose? Explain and support your answer with appropriate calculations.
B. What is the optimal lot size for the item? (Note: There has to be only ONE choice, regardless of supplier).
C. What is the total annual cost of inventory for the chosen (best) lot size?

D = 200
Ordering Cost = CO = 75
Holding Cost = CH = .20

Let's calculate the Annual Demand
Annual Demand = Weekly Demand X Number Operation Weeks Per Year
D ...

Solution Summary

Inventory management has two main types of quantity discount models. We examine the all units discounts to determine which supplier to select and the best ordering quantity.

$2.19