Case Study 8-1: Low Nail Company

Chris Low has invested in a specialized nail company, which has an

annual volume of 2,000 nail kegs. Low is uncertain of the amount of
nails he should order at any time. Order processing is $60 per order
without regard to size. Warehouse costs are $1 per year per keg space.
Under perfect conditions at maximum warehouse potential, according
to EOQ methods, Low would need to order 490 kegs per order. This is
about 4 orders per year. However, Low should also take a number of
other things into consideration and adjust his order number
accordingly.
Assuming conditions constant, Lows supplier now offers a quantity
discount in the form of absorbing all or part of Lows order-processing
costs. For orders of 750 or more kegs of nails, the supplier will absorb
all the order-processing costs; for orders between 249 and 749 kegs,
the supplier will absorb half. From the excel analysis; the Ideal order
size would be 250 kegs per order. Without the supplier deal, he would
have to order 500 kegs per unit. Also, taking into consideration that
statistically, a warehouse, at any give time, is half full, order size is 333
kegs per order. Low would more realistically buy 333 kegs.
Now, if Low needs help paying for the kegs, he would need to get a
loan. Each keg is worth $40. Interest on the loan is 1.5% per month.
From my excel sheet, without considering supplier deal or average
inventory, Low would have to buy 167 kegs per order. He would need
to buy 12 orders of this to fill his quota of 2,000 annual volumes.
Considering supplier deal and average inventory, he would need to buy
250 kegs per unit with a total of 8 orders.