Millennium Liquors is a wholesaler of sparkling wines Their

Millennium Liquors is a wholesaler of sparkling wines. Their most popular product is the French Bete Noire. Weekly demand is for 45 cases. Assume demand occurs over 50 weeks per year. The wine is shipped directly from France. Millennium’s annual cost of capital is 15 percent, which also includes all other inventory-related costs. Below are relevant data on the costs of shipping, placing orders, and refrigeration.
•   Cost per case: $120 •   Shipping cost (for any size shipment): $290 •   Cost of labor to place and process an order: $10 •   Fixed cost for refrigeration: $75/week a.   Calculate the weekly holding cost for one case of wine. b. Use the EOQ model to find the number of cases per order and the average number of
orders per year. c.   Currently orders are placed by calling France and then following up with a letter. Mil-
lennium and its supplier may switch to a simple ordering system using the Internet. The new system will require much less labor. What would be the impact of this system on the ordering pattern?\"

Solution

a. The weekly holding cost for one case of wine is to be calculated as follows:

Let us denote the weekly holding cost for one case of wine as (h)

Weekly holding cost for one case of wine = Weekly cost of capital* Cost per case + Weekly Inventory holding cost per case

h = (15%/50)*($120+$2) + $3 = $3.366  

The Fixed cost of refrigeration is not considered or taken into account, since it is directly associated with depreciation and hence is a sunk cost.

The cost to pick cases when sold is also ignored because it is not capital tied up in inventory while the product is sitting in the warehouse.

________________________________________________________________________________________

b. Number of cases per order using EOQ model is calculated as follows:

EOQ = SQRT(2 × Quantity × Cost Per Order / Carrying Cost Per Order)

Quantity = 45

Cost per order = Setup cost associated with shipping and handling an order

= $290 + $10 = $300

Therefore EOQ = sqrt ( 2*45*300/3.366)

= sqrt (8021.39)

EOQ = 89.56 cases per order

Average number of orders per year is calculated as follows:

Time between two orders = Q/R = 89.56/45 = 1.99 weeks

Average number of orders per year = 50 weeks per year / (Q/R) = 50 weeks per year/1.99 weeks per order

Average number of orders per year = 25.12 orders per year

___________________________________________________________________________________________

c. The frequency of orders increases and the average inventory decreases.

The demand and weekly holding cost per case remains the same thereby increasing the number of orders, hence the frequency in orders also increase.