View Song Electric Ltd. is a major distributor of flat-screen computers in Taiwan.

The flat-screen computers are manufactured in China and major shipments are made
to Taiwan for its computer shops. Since demand for the computers is fairly stable,
shipments are delivered to Taiwan via sea transportation in fixed order quantity
throughout the year. Stephen Lam, a newly the logistics manager of View Song
Electric Ltd., decides to deliver the goods using sea or air carrier service in 2012. He
also wants to implement a Just-in-time system in the company to improve its
customer service level for its future business. Assuming that working days are 360,
the following data is given.

Annual Sales forecast: 292,410 flat-screen computers

Computer value: $900.00
Inventory carrying cost: 20 percent
Order cost to replenish inventory: $400
Order cycle time using sea carrier: 10 days
Order cycle time using air carrier: 4 days
Transportation cost per unit by sea $20
Transportation costs per unit by air $30
a) What is Just-in-time concept? (10 marks)

b) Calculate the economic order quantity. (3 marks)

c) What is the total annual inventory cost excluding transportation (3 marks)

cost?
d) What are the total annual inventory cost including transportation (3 marks)
cost by sea and the reorder point?

e) If the goods are delivered by air carrier and the order quantity is (3 marks)
revised to 1,000 units to meet the unit load device of air freight,
what is the new total annual inventory cost including the air freight
cost?

b) Q = order quantity; S = Carrying cost

R = annual demand; A = Cost of placing an order

Economic Ordering Quantity (EOQ).

EOQ = √ (2 AR/S)
= √ (2 * 400 * 292,410 / 20% * 900)
= √ (800 * 292,410 / 180)
= √ (800 * 292,410 / 180)
= 1,140 units

c) Total annual inventory cost (without transportation costs involved)

TAC = (Q * S) / 2 + (A * R) / Q

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 = (1,140 * 180) / 2 + 400 * 292,410 / 1,140
= 102,600 + 102,600
= 205,200
Total annual inventory cost = carrying cost + ordering cost +
transportation cost by sea
TAC = $205,200 + $20 * 292,410
TAC = $205,200 + 5,848,200
= $6,053,400

Re-order point
= 292,410 / 360 * 10 days
= 8,122.5
= 8,123 unit

d) Total annual inventory cost = carrying cost + ordering cost + air

TAC = (1000 * 180) / 2 + (400 * 292,410) / 1000 + $30 * 292,410
TAC = (90,000 + 116,964) + 8,772,300
= 206,964 + 8,772,300
= 8,979,264

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