In Example 12.3, SolverTable was used to show what happens when the unit shortage cost varies. As the table indicates, the company orders more and allows more backlogging as the unit shortage cost...

In Example 12.3, SolverTable was used to show what happens when the unit shortage cost varies. As the table indicates, the company orders more and allows more backlogging as the unit shortage cost decreases. Redo the SolverTable analysis, this time trying even smaller unit shortage costs. Explain what happens when the unit shortage cost is really small. Do you think a company would ever consider a really small shortage cost? Why or why not? Then redo the SolverTable analysis again, this time trying even larger unit shortage costs. How do the results in this case compare to the results from the basic EOQ model with no shortages allowed?

EXAMPLE 12.3 ORDERING AUDIO CDS AT GMB WITH SHORTAGES ALLOWED

GMB is a mail-order distributor of audio CDs that sells approximately 50,000 CDs per year. Each CD is packaged in a jewel case that GMB buys from a supplier. The fixed cost of placing an order for jewel cases is $200. GMB pays $0.50 for each jewel case, and its cost of capital is 10%. The cost of storing a jewel case for one year is $0.50. GMB believes it can afford to run out of jewel cases from time to time, reasoning that this simply makes the time between customer orders and customer deliveries a bit longer. It knows that there is some cost of doing this—impatient customers can take their business elsewhere— but it is not sure what dollar amount p to attach to this cost. It decides to use a trial value of p = $52, reasoning that this value implies a $1 penalty for each extra week a customer has to wait because of a backlogged jewel case. GMB wants to develop a spreadsheet model to find the optimal order quantity, the optimal amount to backlog, and the optimal annual cost. It also wants to see how sensitive these quantities are to the unit shortage cost p.

Objective To find the order quantity and the maximum shortage allowed that minimize total annual cost, and to see how sensitive the solution is to the unit shortage cost.