Supply Chain Integration Problem

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					SUPPLY CHAIN PROBLEM Advantages of Integration

The

supply

chain

has

two

members,

one

buyer

and

one

seller.

The

buyer

needs 10,000 units of an item per year. Buyer's ordering cost is Rs. 450 per order. Buyer's holding cost is Rs. 100 per unit per year. The seller sets up a production run and produces the buyer's EOQ and dispatches it. His setup cost per set up is Rs. 2750. The seller does not hold any inventory. If the two operate independently, what are the buyer’s inventory costs and if they join together and operate as one unit, what will be the total system cost? Why is the EOQ, in the two cases, different?

QEOQ

= √ (2DS/H) = √ 2*10000*450/100 = √ 90000 = 300

If the two operate independently, costs are: Buyer's Ordering Cost = 450*10,000/300 Buyer's Holding Cost = (300/2)*100 Buyer’s Total Cost = 15,000 + 15,000 Seller's setup cost = 2750*10,000/300 = 15,000 = 15, 000 = 30,000 = 91,667

Total cost to the system = 30,000 + 91,667 = 121,667

If they join together and operate as one unit Ordering Cost per Order = 450 + 2,750 Inventory Holding Cost = 100 QEOQ = √ (2DS/H) = √ 2*10,000*3200/100 = √ 64,00,00 = 800 Buyer's Ordering Cost = 450*10,000/800 Holding Cost = (800/2)*100 Buy’s Total Costs = 5,625 + 40,000 Seller's setup Cost = 2,750*10,000/800 Total System Cost = 45,625 + 34,375 = 5,625 = 40,000 = 45,625 = 34,375 = 80,000 = 3,200,

Total system cost comes down FROM 121,667 TO 80,000! This how Supply chain would benefit the system


				
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posted:10/22/2009
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Description: Problem giving clarity to savings through supply chain integration