1. If ordered from Supplier A, the economic ordering quantity for standard 5-inch winches is 209 units. If ordered from Supplier B, the economic ordering quantity is 148 units. 2. Assumptions of the EOQ model include sales needing to be accurately forecasted, sales needing to be evenly distributed, and orders being received on time. These assumptions appear reasonable when applied to Narragansett Yacht. 3. A. If Narragansett buys from Supplier A, 8 orders will need to be placed each year. If they buy from Supplier B, 11 orders will need to be placed each year.
B. For Supplier A, the reorder point in 50 units, and for Supplier B, the reorder point is 100 units. 4. The total inventory cost for Supplier A is $14, 388, and the total inventory cost for Supplier B is $10,174. Based on the information developed so far, Narragansett should use Supplier B. Even though Supplier B has a higher reorder point and more orders will need to be placed in one year, the total inventory cost is lower. 5. A. Assuming that the desired safety stock is currently on hand and does not need to be purchased, the total cost of ordering and carrying inventories using Supplier A is $19,563. The total cost of ordering and carrying inventories using Supplier B is $20,524.
B. The introduction of safety stocks increases the reorder points. For Supplier A, the reorder point would now be 125 units, and for Supplier B, the reorder point would now be 250 units.
C. Assuming there is a shipping delay, Narragansett could continue to operate before its entire stock is reduced to zero for 25 days using Supplier A and 50 days using Supplier B. 6. The EOQ model could still be used if Narragansett’s sales and production were highly seasonal, but modifications would be required. They could divide the year into the seasons in which annualized sales are relatively constant and then apply the EOQ model to each separate season. 7. Narragansett should take the 2% discount from Supplier A because they would receive an additional benefit of $8,935. They would receive less of a benefit if they took the discount from Supplier B. 8. In order to control the inventory of 5-inch winches, Narragansett could use the red-line method or the two-bin method. For the red-line method, inventory items are stocked in a bin, a red line is drawn around the inside of the bin at the level of the reorder point, and the firm places an order when the red line shows. For the two-bin method, inventory items are stocked in two bins. When the working bin is empty, an order is placed and inventory is drawn from the second bin. 9. The just-in-time system involves having suppliers located near factories. Delivery of components is tied to the speed of the assembly line, and parts are generally delivered no more than a few hours before they are used. It reduces the need for manufacturers to carry large inventories, but it also requires a great deal of coordination between the manufacturer and its suppliers. The close coordination required between the parties using JIT procedure has led to an overall reduction of inventory throughout the production-distribution system and to a general improvement in economic efficiency.
