An online retailer of small gifts orders products from a numberof suppliers, stores them, packs them to customers’ orders, andthen dispatches them using a distribution company. Although broadlysuccessful, the business is very keen to reduce its operatingcosts. A number of suggestions have been made to do this. There areas follows:
? Quality: Make each packer responsible for his or her ownquality. This could potentially reduce the percentage of mis-packeditems from 0.5% to near zero. Repacking an item that has beenmis-packed costs RM1 per item.
? Speed: Negotiate with suppliers to ensure that they respond todelivery requests faster. It is estimated that this would cut thevalue of inventories held by the retailer by RM200,000.
? Dependability: Institute a simple control system that wouldgive early warning if the total number of orders that should bedispatched by the end of the day actually is dispatched in time.Currently 2% of orders is not packed by the end of the day andtherefore has to be sent by express courier the following day. Thiscosts an extra RM1 per item.
If the online retailer dispatches two million items every yearand if the cost of holding inventory is 9% of its value, how muchcost will each suggestion save the company? State the totalsavings
