Inventory Management 30 NARRAGANSETT YACHT CORPORATION

Question What is the economic ordering quantity for standard 5-inch winches if they are ordered from. Supplier A? Supplier B? What assumptions are implied in the EOQ model? Do these assumptions appear reasonable when applied to Narragansett Yacht? How many orders should be placed each year if Narragansett buys from Supplier A? If the ?rm buys from Supplier B? What is the reorder point (in units) for each supplier? Assume for now that no safety stocks are held and use a 360-day year. Calculate the total inventory cost (the cost of ordering plus the cost of carrying inventories) that Narragansett would incur from each supplier. On the basis of the information developed thus far which supplier should Narragansett use? Narragansett currently carries a safety stock of 75 winches to protect itself against stockouts due to delivery delays and/or an increase in its usage rate. However if it decides to switch to Supplier B Narragansett would need to increase the safety stock to 150 units to re?ect Sup-plier B’s longer lead time. Assuming that the desired safety stock is currently on hand what is the total cost of ordering and carrying inventories including the safety stock using Supplier A? What is the cost of using Supplier B? How does the introduction of safety stocks affect the reorder points as calculated in Question 3? Assume that there is a shipping delay. How many days after an order is placed could Narragansett continue to operate at its expected usage rate before its entire stock of 5-inch winches is reduced to zero? Compute this ?gure for both Supplier A and Supplier B. The cost of carrying inventories has been calculated using the current cost of bank loans (see Table 2). Do you think this is the appropriate rate? Explain and in your answer consider both the WACC and tax effects. Narragansett’s production is relatively constant throughout the year but if its sales and pro-duction were highly seasonal could the EOQ model still be used? If so would modi?cations be required? Explain. Suppose Supplier A the current supplier offers a 2 percent discount on the $300 per-unit purchase price on orders of 250 or more units. In an attempt to win the contreact Supplier B is also offering a 2 percent discount on orders of 250 or more. Should Narragansett take the quantity discount from Supplier A? (In answering this question assume that Narragansett holds a 75-unit safety stock.) What are some methods that Narragansett might use to control the inventory of 5-inch winches? That is how can it keep track of the number of units in stock and then be sure an order is placed when the order point is reached? How much difference does it make in terms of total costs if the EOQ is followed exactly as opposed to letting orders vary 10 to 20 percent on either side of the EOQ? If you are using the Lotus model provide some data to support your answer. There is some question as to the proper cost of capital to be applied to estimate carrying costs. How sensitive is the EOQ to carrying costs if Supplier A is used? Put another way does the cost of capital used to obtain the EOQ make a great deal of difference or only a little difference in terms of the resulting EOQ? If you are using the Lotus model provide some data to support your answer and show the effect of the changed EOQ and carrying costs on total costs. How sensitive is EOQ to ordering costs assuming a carrying cost of 23 percent is used? Again if you are using the Lotus model show the effect on total costs. In many situations companies are using just-in-time inventory procedures with good results. What is involved in the JIT approach and what factors would need to be considered before you could recommend that Narragansett adopt or not adopt a JIT system?

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