1.

Piston
Gears R' Us Kingdom
Annual material cost 117000000 112320000
Average cycle inventory 50 500
Annual cost of holding cycle inventory 50000 480000
Standard deviation of demand during lead time 87.46427842 1807.795619
Safety inventory required 143.8659356 2973.559181
Annual cost of holding safety inventory 143865.9356 2854616.813
Annual cost 117193865.9 115654616.8

A.) Annual Cost of Gears R' Us 117,193,865.94

B.) Annual Cost of Piston Kingdom 115,654,616.81
C.) What supplier would you choose? Piston Kingdom
D.) If you could use both, how would you structure Anything more than 4000 will be ordered
your orders? from Gears R Us.
2. Imagine that Mr. De Leon has chosen Gears R’ Us as your supplier. Piston Kingdom very much
wants your business and offers you the choice of three mutually exclusive alternatives: a reduced
lead time to 1 week, a reduced minimum batch to 800, or a reduction in standard deviation of lead
time by 1 week.
a. Table 1 shows the expected annual costs of undertaking each of the three options offered by
Piston Kingdom. Based on the table, the option with the lease annual cost, which is $ 113,560,320,
is reduction in StDev of Lead Time to 1 week.
Table 1. Annual Costs for each of the three options.
Alternatives Expected Annual Cost
Reduced Lead Time to 1 week $ 115,646,400.00
Reduced minimum batch to 800 $ 115,559,040.00
Reduction in StDev of Lead Time to 1 week $ 113,560,320.00

b. Table 2 shows the total annual cost if all the three offers can be put into effect. Based from the
table, the annual cost would be $113,425,920.
Table 2. Total Annual Cost if all three options could be put into effect.
Annual Material Cost $ 112,320,000.00
Annual Cost of Holding Cycle Inventory $ 384,000.00
Annual Cost of Safety Inventory $ 721,920.00
Total Annual Cost $ 113,425,920.00

c. Based from the calculated values presented from Table 1 and 2, Mr. De Leon must still choose
Piston Kingdom as the supplier, however, he must choose the third offer which is to reduction of
standard deviation of lead time to 1 week. Choosing the third offer will decrease the total annual
cost by $ 2,094,720.00.