Question: Northern Manufacturing Company

The manager of an inventory system at Northern Manufacturing Company regularly makes use of EOQ inventory models in decision-making for purchasing and stocking items for sale to customers. The manager has not considered backorder models because of the assumption that backorders are generally inappropriate for this company and should be avoided. However, with upper management's continued pressure for cost reduction, he has been asked to analyze the economics of back-ordering policies for some products that can possibly be back ordered without high cost or significant loss of customer satisfaction. For a specific product with D = 800 units per year, Co = $150, Ch = $3 and Cb = $20:

(a) Determine the difference in total annual cost between the EOQ model and the planned shortage or backorder model for this product.

(b) If the manager adds constraints that no more than 25% of the units can be back ordered and that no customer will have to wait more than 15 days for an order, determine if the backorder inventory policy should be adopted. Assume 250 working days per year. Provide a narrative that explains the Management Scientist solution used.