Extra Credit: Wintel Inc. Manufactures And Sells Des

Extra Credit Wintel Incwintel Inc Manufactures And Sells Desktops

Wintel Inc. manufactures and sells desktops and notebooks, sourcing monitors from Bay Electronics Co. The company's annual requirement for monitors is 24,000 units at a unit cost of $60. Bay Electronics does not offer quantity discounts, and the company consistently meets delivery schedules. The order cost per shipment is $1,000, and the inventory carrying cost per unit per year is $300. Recently, Wintel's production capacity has expanded, allowing internal production of monitors at a weekly rate of 800 units, with a two-week lead time. The internal production cost per monitor is anticipated to be $65, with a setup cost of $750 per run. Management seeks to optimize inventory policies and determine whether outsourcing or internal production is more cost-effective.

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To analyze Wintel Inc.'s optimal inventory policy for managing monitor procurement, we must evaluate two scenarios: outsourcing from Bay Electronics and internal production. The core objective is to determine the economic order quantity (EOQ) and the associated total annual costs under each scenario, facilitating an informed recommendation for the company's procurement strategy.

Scenario 1: Outsourcing Monitors from Bay Electronics

In this scenario, Wintel operates with an EOQ model that considers purchase costs, ordering costs, and holding costs in a classic economic order quantity framework. Given the annual demand (D) of 24,000 units, ordering cost (S) of $1,000, and carrying cost (H) of $300 per unit annually, the EOQ is calculated via the formula:

EOQ = sqrt((2  D  S) / H)

Substituting the known values:

EOQ = sqrt((2  24,000  1,000) / 300) = sqrt(48,000,000 / 300) = sqrt(160,000) ≈ 400 units

The optimal order quantity for outsourcing is approximately 400 monitors per order. The number of orders per year (N) is:

N = D / EOQ = 24,000 / 400 = 60 orders

The total annual ordering cost (OC) is:

OC = N  S = 60  1,000 = $60,000

The average inventory level (I) is half of EOQ:

I = EOQ / 2 = 200 units

The annual holding cost (HC) is:

HC = I  H = 200  300 = $60,000

Thus, the total annual inventory cost for outsourcing monitors is:

Total Cost (Outsourcing) = Purchase Cost + Ordering Cost + Holding Cost
= (D * unit price) + OC + HC
= (24,000 * 60) + 60,000 + 60,000 = $1,440,000 + $120,000 = $1,560,000

Note that purchase cost dominates the total, but the EOQ's influence ensures efficient ordering without excess inventory buildup.

Scenario 2: Internal Production of Monitors

With internal production, the EOQ calculation must consider additional factors: the production rate (p), lead time, and setup costs. The weekly production rate is 800 units, over a 52-week year, leading to total annual production capacity of:

Total capacity = 800 units/week * 52 weeks = 41,600 units/year

The demand of 24,000 units is well within this capacity, allowing continuous production. The production per cycle (Q) is determined similarly, but adjusted for production setup costs (S = $750), and the unit cost is $65, which impacts total cost but not EOQ calculation directly. The classical EOQ for internal production (assuming instantaneous changeover and no shortages) is:

EOQ = sqrt((2  D  S) / H)

This yields the same as the outsourcing case: around 400 units per order. However, the critical difference lies in the production scheduling considering lead times and rate constraints.

Given the two-week lead time and a production rate of 800 units per week, the maximum output per cycle is:

Production per cycle = 800 units/week * 2 weeks = 1,600 units

This suggests that ordering quantities up to 1,600 units are feasible per production run, which is more than the EOQ. Cost-wise, setup costs per cycle of $750 spread over the production volume lead to a per-unit setup cost of:

Setup cost per unit = $750 / 1,600 ≈ $0.47

The internal production cost per unit is $65, and considering additional costs like variable manufacturing costs, the total per-unit cost is marginally higher than outsourcing; however, the internal process allows for inventory buffering and flexible scheduling, potentially reducing stockouts and emergency procurement costs.

The total annual production cost (excluding setup) is:

Production cost = D  unit cost = 24,000  65 = $1,560,000

The setup costs across the year are:

Number of setups = D / EOQ = 24,000 / 400 = 60 setups
Total setup cost = 60 * 750 = $45,000

The total internal production cost then is:
Production cost + setup costs = $1,560,000 + $45,000 = $1,605,000

Similarly, the average inventory in the internal production scenario, considering production batching, will be slightly different but roughly approximates 200 units, leading to an annual holding cost of $60,000 (consistent with outsourcing). Overall, internal production incurs higher variable costs but allows greater flexibility and potential savings through reduced logistics costs and better inventory management.
Comparative Analysis and Recommendations
The total costs calculated show that outsourcing costs are approximately $1,560,000 annually. Internal production, considering setup and production costs, is approximately $1,605,000. The difference is minimal but slightly favors outsourcing based on simple cost calculations. However, factoring in operational flexibility, lead time mitigation, and potential for quality control, internal production may present strategic benefits despite a marginal cost increase.
Moreover, internal production affords Wintel Inc. the ability to align monitor availability more closely with production schedules, potentially reducing inventory levels and associated costs further, especially if demand fluctuates or cycle times vary. Conversely, outsourcing minimizes manufacturing overhead, reduces internal resource commitment, and leverages Bay Electronics' reliable delivery service.
Given the comparable costs, the final decision hinges on strategic priorities: cost minimization or operational flexibility. If Wintel values inventory responsiveness and internal control, producing monitors internally could be advantageous. However, if cost saving is paramount, outsourcing remains a sound choice.
In conclusion, the company should undertake a comprehensive analysis integrating these cost models with operational considerations. If internal production offers significant strategic benefits and the marginal cost difference is acceptable, shifting towards internal manufacturing may be preferable. Conversely, maintaining supplier relationships and focusing on cost efficiency supports outsourcing as the optimal strategy.
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