Disk Drives Limited (DDL) produces a line of internal Winchester disks for microcomputers. The drives use a 3.5-inch platter that DDL purchases from an outside supplier. Demand data and sales forecasts indicate that the weekly demand for the platters seems to be closely approximated by a normal distribution with mean 40 and variance 120. The platters require a three-week lead time for receipt. DDL has been using a 35 percent annual interest charge to compute holding costs. The platters cost $17.80 each, order cost is $70.00 per order, and the company is currently using a stock-out cost of $400.00 per platter. (Because the industry is so competitive, stock-outs are very costly.)
a) Because of a prior contractual agreement with the supplier, DDL must purchase the platters in lots of 500. What is the reorder point that it should be using in this case?
b) When DDL renegotiates its contract with the supplier, what lot size should it write into the agreement?
c) How much of a penalty in terms of setup, holding, and stock-out cost is DDL paying for contracting to buy too large a lot?
d) DDL’s president is uncomfortable with the $400 stock-out cost and decides to substitute a 98 percent fill rate criterion. If DDL used a lot size equal to the EOQ, what would its reorder point be in this case? Also, find the imputed cost of shortage.