The Wilson Contract Manufacturing Company assembles a variety of specialty products for companies who (typically) design the product and manage the brand, but outsource components to Asian manufacturers and final assembly to WCM.
One particular customer has a buying arrangement in which they guarantee to buy 80 units per day; WCM works 365 days per year. WCM has a dedicated line that runs constantly to produce this item. The most expensive input, part # AY-65, costs $125 per unit and is purchased from an outside vendor. The carrying cost rate, including physical costs and the cost of capital, is estimated to be 22% of item value. Further, WCM did a cost study that shows that the cost of placing and receiving an order is $500, mainly because they have an automated machine that must be set up to perform inspection. Their cost study shows that other costs of placing and receiving an order are based on the number of units received rather than a onetime cost.
The supplier has a long and variable lead-time for AY-65, for several reasons. The total lead-time (production plus shipping) is distributed with a mean of 21 days and a standard deviation of 5 days. WCM would like to be 99% sure that they do not shut down the line for lack of parts. That is, 99% of the orders must arrive before WCM runs out of stock. The contract with the supplier requires WCM to pay for the items 10 days after they are shipped from the producer. WCM pays the transportation cost directly to the shipping company.
They need your advice on several issues.
Write a brief report answering all the questions.
Show calculations for all questions except 6, 9, and 10.
Questions for Wilson Contract Manufacturing:
1. Currently, what order quantity should they use, and what level of safety stock should they maintain?
2. How many shipments will there be per year?
3. What is the annual cost of the safety stock?
4. WCM is considering changing shipping firms. One firm says they can reduce the total lead time to a mean of seven days with a standard deviation of two days, and they will write a contract with appropriate penalties included for not living up to that. How much additional could WCM pay this shipper per year and still break even? WCM still will pay the production company 10 days after the items are shipped.
5. The shipping firm in question 4 also says they are willing to guarantee exactly 10 days total lead time. The shipper will hold the inventory if it arrives early. Which is better for WCM, μ = 10 and δ = 0 days, or μ = 7 and δ = 2 days? In one short sentence, what is troublesome about these calculations?
6. WCM believes they can invest in setup cost reduction and reduce that cost to $50. How much should they be willing to pay for this benefit? Remember that 0.01 was stated as the probability of stockout per cycle. However, WCM probably will want to change that if they order more times per year. You should comment briefly (one short sentence) on the safety stock issue, without calculations.
7. Assume WCM is going to use the original shipper. Now the shipper says that they will reduce the shipping cost per unit by $2 if WCM orders at least 1200 units. Should they accept the offer?
8. Suppose demand averaged 80 per day with some variation, rather than being constant as assumed up until now. How would the answer in question 7 change? You do not need to do any calculations, just explain what would change and why.
9. If the manufacturer were to change the credit terms so that WCM is allowed to pay 20 days after the items are shipped, how will that change the answers to the quantitative questions above. You need not redo calculations; briefly discuss the effect.
10. Very briefly discuss concerns you might have about this situation. What might be missing in the analysis above?
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