McDonalds Case Study

1. For an item, the following data is available regarding the item's monthly forecasts for the upcoming 12 months.

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

628 884 2089 1650 1194 197 807 853 467 1384 552 697

Since this item is purchased from a supplier, there is a $200 transaction cost for each order of the item. Holding cost for inventory of the item is 5% of the unit cost of the item. The full-price paid to the supplier is $10/unit. Assume that demand for the item occurs throughout the year. The average lead time of supply, counted as the time between when an order is placed to the supplier to the time when the company receives the order, is 6 days. Consider two scenarios regarding the item:

a. The item is a A-category item for the company - in this case, how much should the company be optimally ordering from the supplier and what is the amount of safety stock that the company should carry for this item? What should be the reorder level and order interval for such a scenario?

b. The item is a C-category item - in this case how much should be the optimal order quantity and corresponding safety stock? What should be the reorder level and the order interval for such a scenario?

c. Would your decisions in Parts (a) and (b) change if there is a 2% discount provided by the supplier on the price of the item any time the order size exceeds 5,000 units? If so, what will be the changes?

(Make any other assumptions you may need to arrive at the decisions. State the assumptions clearly. Also, any conclusions you derive for the above decisions need to be supported by the appropriate analysis/calculations).