Reconsider Example 12.1. Each time Machey’s orders cameras, it incurs a $125 ordering cost. Assume that Machey’s could make an investment to decrease this ordering cost. Suppose that any 10% decrease costs a fixed amount, C dollars. Using i = 0.10 and Solver, experiment with different values of C to see how Machey’s optimal order quantity is affected. Assume the minimum possible ordering cost is $35.
EXAMPLE 12.1 ORDERING CAMERAS AT MACHEY’S
Machey’s Department Store sells 1200 cameras per year, and the demand pattern throughout the year is very steady. The store orders its cameras from a regional warehouse, and it usually takes one week for the cameras to arrive after an order has been placed. Each time an order is placed, an ordering cost of $125 is incurred. The store pays $100 for each camera and sells them for $130 apiece. There is no physical storage cost, but the store’s annual cost of capital is estimated at 8% per year—that is, it can earn 8% on any excess cash it invests. The store wants to determine how often it should order cameras, when it should place orders, and how many cameras it should order in each order.
Objective To determine when to order and how much to order so that the store never runs out of cameras and profit is maximized.
WHERE DO THE NUMBERS COME FROM?
Throughout this chapter, you can refer back to sections 12.2 and 12.3 for a general discussion of the inputs to these inventory problems. For this reason, there is no “Where Do the Numbers Come From?” section in later examples.