Derakhshan Case
The Derakhshan Division of Gilmore Co Inc. provides emerald precious stones. The
stones should be shipped in a particular box which keeps the gem safe in shipping
and has a label so customer know how to contact for another order. Derakhshan buy
these boxes from Kohe Noor Company (supplier). For coming year Derakhshan
needs 115 of these boxes daily. The current price of this box is $30. Under the
present arrangement with the supplier, the Derekhshan must take one twelfth of its
annual need every month. This agreement was reached in order to reduce lead time
by assuring Gilmore a regular spot on the supplier’s production schedule. Without
this agreement, the lead time would be about 14 weeks. No quantity discounts are
offered on these boxes; however, the supplier requires that a minimum of 500 boxes
be on an order. Derakhshan has enough space to store boxes. Derakhshan stores the
emerald stones in a separate safe storage under highly protected environment.
Associated with each shipment of boxes is ordering costs of $200, which include all
the costs. In addition, inventory carrying costs (including taxes) on all items are
considered to be 15% of the purchase price per unit per year. (Consider each week
as 5 working days).
1) What is optimal order number of boxes that should be placed in each order?
2) Determine the number of orders per year?
3) What is the optimal reorder for boxes?
4) What cost saving will Derakhshan Inc. realize if it implements an order based on
EOQ? (Hint, estimate the total cost under optimal solution and total cost under
current situation, then compare the two situations).
