Question

The Amazon headquarters campus in Seattle, WA has a small cafeteria that has adopted optimal inventory policies to maximize its profit. It currently evaluates its management of two durable items, A and B, and two perishable items, C and D. Fill in the blanks below based on the given choices (i, ii, iii, or iv) by briefly explaining your reasoning. - [6 pts] Ordering A and B. Demand for these items are constant. They have the same fixed ordering cost and lead time. However, item B has a higher weekly demand and smaller unit purchasing cost than item A. The optimal order quantity of B will be and its re-order point will be that of A. (i) larger than, (ii) smaller than, (iii) equal to, or (iv) cannot be determined? - [4 pts] Ordering C and D. Items C and D are identical except their demand variability and unit purchasing cost: Item C has a lower demand variability and it is cheaper to procure. The optimal order quantity of C will be that of D. (i) larger than, (ii) smaller than, (iii) equal to, or (iv) cannot be determined? - [3 pts] Recommendation. Considering the possible trade-offs and challenges the cafeteria management might be facing, provide one specific recommendation that can help it better manage its inventory while achieving a higher total profit (in total of 1-3 sentences).

Answer 1

1.

Ordering A and B:

The optimal order quantity for item B will probably be larger than item A. This is because item B has a higher weekly demand, which means it might make sense to order more of item B to meet that demand efficiently and reduce the frequency of orders.

The re-order point for item B will be equal to that of item A. Since both items have the same lead time and constant demand, the re-order point will be the same for both.

2.

Ordering C and D:

The optimal order quantity for item C will probably be larger than item D. Lower demand variability for item C suggests that it may be more predictable, allowing for larger, less frequent orders to minimize ordering costs.

3.

Recommendation:

Implement a Just-in-Time aka (JIT) inventory system:

By adopting a JIT approach, the cafeteria can reduce excess inventory and associated holding costs. This system ensures items are ordered and restocked only when they are needed, minimizing waste and improving overall inventory turnover. It can be particularly effective for perishable items like food, helping to maintain freshness while optimizing costs.