Supply Chain Management

Discussion and Exercises

Quantity Discounts Example

A furniture manufacturer uses 20,000 square feet of plywood per month. Its trucking company charges $400 per shipment, independent of the quantity purchased. The manufacturer offers an all unit quantity discount with a price of $1 per square foot for orders under 20,000 square feet, $0.98 per square foot for orders between 20,000 square feet and 40,000 square feet, and $0.96 per square foot for orders larger than 40,000 square feet. The holding cost is 20 percent.

Questions

1. What is the optimal lot size for this company? 2. What is the annual cost of such a policy? 3. What is the cycle inventory of plywood? 4. How does it compare with the cycle inventory if the

manufacturer does not offer a quantity discount but sells all plywood at $0.96 per square foot?

Discussion and Exercises

Discounts when the a company has market power

A company has introduced a new music device that is sold through a major electronics retailer. The retailer has estimated that demand for the device will depend on the final retail price p according to the demand curve

Demand D=2,000,000−2,000p

The production cost for the company is $100 per device.

Questions

1. What wholesale price should the company charge for the device? At this wholesale price, what retail price should the retailer set? What are the profits for the company and the retailer at equilibrium?

2. If the company decides to discount the wholesale price by $40, how much of a discount should the retailer offer to customers if it wants to maximize its own profits? What fraction of the discount offered by the company does the retailer pass along to the customer?

Discussion and Exercises

Economic Ordering Quantity (EOQ): Exercise

Ford and GM carry spare parts for their dealers at a third-party warehouse in Michigan’s Upper Peninsula. Demand for Ford spare parts is 100 units per month, whereas demand for GM parts is 120 per month. Each spare part costs $100 and both companies have a holding cost of 20 percent. Currently, each company uses a separate truck to ship these parts. Each truck has a fixed cost of $500.

What is the optimal order size and frequency for Ford? For GM? What is the annual ordering and holding cost for each company?

Aggregation Exercise

A third-party logistics provider has offered to combine shipments for each of the two companies on a single truck. This will increase the cost of each truck to $600. If the two companies agree to the joint shipment, what is the optimal order frequency and size? What is the annual ordering and holding cost for the two companies combined? Should Ford and GM accept the third party’s proposal? How should they divide the fixed cost per truck among themselves?