Rodman Industries of Barstow, California, sells among other items, specialized tires for off-road vehicles (ORV). A new ORV model requiring tires slightly larger than normal is being developed by Pacific Star Enterprises in nearby Apple Valley. Pacific Star and Rodman have done business together for years, and Rodman has contracted with Pacific Star to supply tires for the new vehicle. Rodman’s staff analyst has estimated that Pacific Star’s •weekly demand will follow approximately a normal distribution, with a mean of 2000 tires and a standard deviation of 100 tires. Rodman charges Pacific Star $25 per tire, and Rodman’s holding costs are figured at 20% per year.

Manu facturing /Purchasing Options

Rodman has three choices available to it for supplying tires to Pacific Star:

1. Rodman can convert production line 3 to manufacture the tires. The equipment on this line can be converted at a cost of $150,000 to produce the new tire. This production line will have a maximum production rate of 4000 tires per week. It takes roughly one week to set up between production runs, and each setup costs approximately $4000. Unit production costs (raw materials and labor) are $ 1 2 per tire.

2. Rodman can convert production line 5 to manufacture the tires. This line is capable of producing only 1800 tires per week. It is very reliable, however, and, after a conversion cost of $75,000, the line is expected to run without failure. Although this option means that Rodman could supply Pacific $tar with only 1800 tires per week, Pacific $tar has indicated that it would accept this quantity, if necessary. Again, unit production costs (raw materials and labor) are $12 per tire.

3. Rodman can purchase tires from Hiro Inc., a Japanese firm, and import them to its Ban Pedro warehouse for distribution directly to Pacific Star. Reorder costs, which include some substantial shipping fees, are estimated at $10,000 per order, and shipping time is consistently two weeks from the time an order is placed. Iliro charges $14 per tire but offers the following all units discount pricing schedule:

Safety Stock

While selecting option 2 allows Rodman to maintain no safety stock, for options 1 and 3 Rodman should have enough safety stock to maintain at least a 90% cycle service level.

The Report

On the basis of the given information, prepare a business report for Rodman suggesting a policy that will optimize total weekly profit for the company. Assume that this is a three-year project (156 weeks) and that conversion costs can be amortized at a constant rate over this time period. Include in your report any assumptions you made (or model assumptions you violated) in doing your analysis. The report should contain a table giving, for each option, the optimal order or production quantity, the reorder or setup point, and the total weekly revenue, costs, and profit.