Suppose you are stocking parts purchased from vendors in a warehouse. How could you use a ( \(Q, r\) ) model to determine whether a vendor of a part with a higher price but a shorter lead time is offering a good deal? What other factors should you consider in deciding to change vendors?

Short Answer

Expert verified
Answer: To determine if the higher-priced vendor with a shorter lead time is a good deal, you need to compare the total costs for both vendors considering purchase cost, ordering cost, holding cost, and shortage cost. Additionally, evaluate the impact of a shorter lead time on inventory level and holding cost. Lastly, consider factors such as quality, reliability, flexibility, and vendor relationships before making a decision.

Step by step solution

01

Understand the \(a(Q, r)\) model

The \(a(Q, r)\) model is a continuous-review inventory control model where an order for Q units is made whenever the inventory position drops to or below r (reorder point). The objective of this model is to minimize the total cost of inventory, which includes ordering, holding, and shortage costs.
02

Calculate the total cost for each vendor

For each vendor, calculate the total cost using the \(a(Q, r)\) model by considering the purchase cost, ordering cost, holding cost, and shortage cost (if applicable). The purchase cost consists of the unit price and any additional costs for ordering from each vendor.
03

Calculate holding cost and lead time implications

Examine the impacts of shorter lead time on the inventory level and the holding cost. A shorter lead time may allow the company to maintain a lower inventory level and reorder level, which may reduce holding cost. Compare the holding costs between the two vendors for the same service level.
04

Compare the total costs

Compare the total costs of the two vendors considering all factors (purchase cost, ordering cost, holding cost, and shortage cost). Take the difference of the total costs to find out if the higher-priced vendor with a shorter lead time is providing a good deal.
05

Discuss other factors to consider

Apart from the costs and lead time, consider other factors such as quality, reliability, flexibility, and relationship with the vendors to make a decision. Evaluate the impact of these factors on the long-term goals of the company and decide on changing vendors accordingly.

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