Inventory Worksheet
Rodman Industries sells, among other items, specialized tires for off-road vehicles (ORV). A new ORV model requiring tires slightly larger than normal is being developed by Pacific Star Enterprises in nearby Apple Valley. Pacific Star and Rodman have done business together for years, and Rodman has contracted with Pacific Star to supply the tires for the new vehicle.
After some preliminary observations of demand patters, Rodman is unsure whether he should assume demand is constant. He believes normal distribution of the weekly demand should work well for him, but he needs to confirm this is really so. He also wants to determine the mean and standard deviation of this normal distribution. Rodman has collected 8 months of weekly demand records and now is asking you to help him determine the demand pattern. Specifically, he would like to know whether or not the average demand is changing over time. Secondly, he argued it would be easier for him to analyze inventory policies if the demand distribution is found to be normal. He asked you if you could conclude that a normal distribution would be an appropriate description for the uncertain behavior of the demand. As far as cost information Rodman estimates its holding rate to be 20% a year (.4% on weekly basis). Pacific agrees to a price of $25 per tire.
To supply the tires Rodman is considering one of the following three options:
Option 1: Convert production line 1 to manufacture the tires. Conversion of equipment on this line will cost Rodman $150,000. Maximum production rate will be 4,000 tires per week. Set up time of the line before each production run will be one week, and the set up procedure will cost $4,000. Unit production cost (for raw materials and labor) is $12.
Using this line requires enough safety stock to maintain a 90% cycle service level.
Option 2: Convert production line 2 to manufacture the tires. This line is capable of producing only 1,800 tires per week, however, it is very reliable and after a conversion cost of $75,000 the line is expected to run without failure. Unit cost will be again $12.
No safety stock is required if using this production line.
Option 3: Import tires purchased from Hiro Inc., a Japanese firm. Stock the tires in its San Pedro warehouse for distribution directly to Pacific Star. Ordering cost which include substantial shipping fees, are estimated at $10,000 per order, and shipping time is consistently two weeks from the time an order is placed. Hiro charges $14 per tire but offers the following all units discount pricing schedule.
Order QuantityDiscount
Under 5000None
5,000 – 9,9997.5%
10,000 or more15%
Using this line requires enough safety stock to maintain a 90% cycle service level.
Finally, assume this is a three year project (156 weeks) and conversion costs are amortized at a constant rate over this time period.
Write a report that includes the following items:
(1)Suggest a policy that maximizes Rodman’s weekly profit.
(2)The report should contain a table giving, for each option:
- Optimal order or production quantity.
- The reorder or set up point
- Total revenue, cost, and profit per week.
(3)Show your calculations for each option. Particularly, include at least the procedure involved in determining the demand distribution, each cost, order size or production lot size, the reorder point, safety stock.