Case Study:Heinkel-Fishbein, Inc.
           Heinkel-Fishbein is a large importer and distributor of robotictoys. The toys are stored in the warehouse and are shipped to aseveral large retail chains at a unit price of $60. The retailstores sell the toys at $99.95, or at discounted prices on saledays. There is almost no possibility in the near future of changingthe prices at which Heinkel-Fishbein supplies the retailstores.
           Considering one toy, identified as SKU 2600, the process consistsof receiving the boxes as shipped by the manufacturer, and storingin the warehouse to be divided and shipped to the stores as pershipment schedule. The cost factors are described as follows. Thesupplier has a discount schedule, and the prices are lower for ahigher volume of order, or shipment. Two suppliers are consideredhere, and their discount schedules are shown in TablesC1 and C2, respectively. The inventoryholding cost remains the same for both suppliers at 0.25 (25%) ofthe purchase price. The Ordering Cost (Setup Cost) is also the sameat $60. The annual demand for SKU 2600 is 24,000 units[1]. Thereason for having alternate suppliers is that the contract is upfor review for the next year, and the company needs to determinethe best policy.
           Under the current contract, the toys are produced and supplied bySchneider Gmbh in Germany, with an annual contract for regular andtimely supply. The discount schedule for the contract, and theprices related to this contract, are shown in TableC1. An alternate set of prices and discounts has beenobtained from Yamaguchi in Japan, as shown in TableC2. Heinkel-Fishbein must consider the two setcomparatively for the next year.
Table C1.
Quantity | Price |
    1 - 1999 | $40.00 |
2000 - 3999 | $38.00 |
4000 - 7999 | $35.00 |
8000 + | $32.00 |
Table C2.
Quantity | Price |
    1 - 1999 | $40.00 |
2000 - 3999 | $36.00 |
4000 - 7999 | $34.00 |
8000 + | $32.00 |
           From the pricing tables, as given above, it is evident that theYamaguchi offer is attractive with respect to pricing based onvolume. However, there are some concerns. The lead- time fordelivery from Germany is typically 10-12 working days, or 2 weeks.The lead-time for delivery from Japan is at least 4 weeks. Thisplaces a pressure on Heinkel-Fishbein to stock a larger number ofunits to account for the variability of demand in lead-time and thepossibility of a stockout. The contract requirements with theretail stores state that in the case of a stockout,Heinkel-Fishbein must pay a penalty of $100 per unit of stockout.Typically, a stockout occurs in periods of high demand, such asholidays and special demand periods. There is a need to define theinventory policy for the coming year.
[1] Similar calculations would apply to all other SKUs.
Questions
1. Considering costs alone, what are the respective costs of thedifferent ordering policies? PLEASE INCLUDE CALCULATIONS!
2. In a JIT environment, a typicalapproach is to consider annual demand as the quantity of an order,with prices that apply to this quantity. Comment on this approachin this context.
3. Comment on the cost of stockouts,and the need for avoiding stockouts in terms of the costs. Whatdoes it do to inventory policy?
