Nordlund Boat Company has been repairing, refitting, and building custom boats in the Pacific Northwest for over 60 years. One of the engine’s most critical components is the exhaust manifold, and TJ, as the buyer in charge, plays a pivotal role in managing this item. The company purchases this item from the best manufacturers in the world, which is a testament to our commitment to quality.
Under the current ordering practice, TJ’s purchasing agent submits an order for the exhaust manifold every 4 weeks, aligning with the company’s monthly demand of 50 units (2 units per working day). Despite its low volume, Nordlund emphasizes quality over quantity discounts, ensuring its commitment to delivering top-notch products. The supplier’s commitment to deliver within one week of order placement has ensured that Nordlund never experiences a shortage, a key factor in the company’s inventory management.
Accounting has generated the following inventory-related costs. The procurement costs are $50 per order, including labor, transportation, receiving, inspection, and moving costs. The holding cost is $20 per item per year, considering storage, damage, insurance, taxes, etc. The company president has assigned TJ, who recently graduated with an MBA, the responsibility of conducting a thorough assessment of the exhaust manifold procurement process, focusing on enhancing supply chain efficiencies. This directive highlights the potential for substantial cost savings, which is crucial for ensuring the company’s financial well-being.
DISCUSSION QUESTIONS (MAKE NO ASSUMPTIONS). (Keep two decimals)
How many units are ordered under the current practice?
What is the total annual inventory cost of ordering LCDs every 4 weeks?
What is the annual inventory cost if orders are released according to the optimal order quantity model?
What potential cost savings can be achieved by ordering every 4 weeks vs. the optimal quantity model?
What is the LCD’s (ROP) reorder point?
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