I can’t say I ever contemplated this before but the problem proposed by Andrew Andrade does happen in the world of inventory and supply chains – and here’s how he breaks it down:
Jefferson Plumbing has know demand of 100 units annually, from loyal customers, of a specialty faucet that is ordered from a long time supplier. Alex received a letter from the supplier informing him that they would be increasing their minimum order quantity. The new minimum order quantity is triple what would normally be ordered. Due to their storefront’s city location, inventory holding costs for the faucet are expensive. Jefferson Plumbing Supplies has a warehouse with a cheaper annual holding cost, and Alex would like to determine the optimum costs previous to, and after the policy change.
Since the minimum order quantity is greater than yearly demand, therefore there will only be a maximum of 1 order within a year from the manufacturer. The initial assumption will be made that it is cheaper to store inventory at the warehouse and order parts when required. This assumption will be later verified by comparing the total cost to the base case.
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