Question

Elliott Inc Elliott Inc. is a manufacturer of fancy spectacles located in Bath a city to the east of London. It procures its raw materials from three suppliers in London. Elliott Inc., rents trucks from Wentworth & Co., to source separately from each supplier. Each truck rental costs a flat rate of £800.00. Wentworth & Co also charges Elliott Inc. an extra £200.00 for each stopover. Elliott Inc is considering aggregating sourcing on a single truck. Elliott Inc. sources materials from suppliers based on the demand it faces. The most commonly sold spectacles has an expected demand of 15000/year, the medium selling spectacles have a demand 9000/year, and most expensive and least demanded spectacles have a demand of 2700/year. Each spectacle costs $3 and Elliott Inc., incurs an annual holding cost of 20 percent. a) What is the optimal order quantity of each part if Elliott Inc., sources separately from each supplier? What is the annual transportation and holding cost? b) What is the optimal order quantity for each product if Elliott Inc. aggregates shipments from each of the three suppliers into a single order? What is the annual transportation and holding cost? c) What is the optimal order quantity if Elliott Inc, wants a tailored ordering policy? What is the annual transportation and holding cost?

Answer 1

To find the optimal order quantity, the Economic Order Quantity model can be used for separate sourcing, aggregated sourcing, and a tailored ordering policy for Elliott Inc. Each scenario will have different implications for ordering and holding costs due to the variation in ordering frequencies and the number of trucks required.

Step-by-step explanation:

The question asks for the optimal order quantity (OOQ) and the associated annual transportation and holding costs for Elliott Inc., a manufacturer of fancy spectacles. First, it's necessary to calculate the OOQ for each product when sourced separately, then when aggregated, and finally to suggest a tailored ordering policy. The Economic Order Quantity model (EOQ) can be used for such calculations:

Separate Sourcing EOQ:

Using the EOQ formula \(EOQ = \sqrt{(2DS/H)}\), where \(D\) is demand, \(S\) is the ordering cost, and \(H\) is the holding cost, we can calculate the OOQ for each product. For the commonly sold spectacles:

• Demand (D) = 15000 units/year
• Ordering Cost (S) = £800 per truck
• Holding Cost (H) = 20% of the cost of one unit per year ($3 * 20% = $0.60)

Plug these values into the EOQ formula to find the OOQ for the other spectacles respectively. Next, calculate the annual transportation and holding costs.

Aggregated Sourcing EOQ:

When aggregating shipments, the ordering cost diminishes since all products are on a single truck. The EOQ will change due to the adjusted ordering cost, which now includes the additional £200 for each stop but reduces the number of trucks.

Tailored Ordering Policy EOQ:

This requires calculating a policy that minimizes costs for all products together, likely necessitating a combination of both separate and aggregated shipping strategies. After determining OOQ for the best ordering policy, calculate the new annual transportation and holding costs.

Keep in mind, EOQ assumes constant demand and steady ordering costs which may not reflect real-world dynamics, but it offers a simplified model for inventory management planning.