Dadus Dilemma Updated 1

Dadu’s Dilemma: How much to order ? Mr. Dadu, the owner of Cyber Country Computers (CCC) has once again summoned Mr. Mayank to meet him. Mr. Mayank passed his MBA and joined CCC as a Finance Manager. CCC has been the leader for a decade in buying used computer components, repair, assemble and sell them at attractive prices. The firm on an average buys 50,000 units of second hand computers annually at an average price of INR 7000 per unit. Due to attractive prices, CCC has been able to penetrate the market with ease. The target group for CCC have been the lower middle class customers, especially students. The firm has performed exceeding well in last few years. Each time the firm orders for fresh lot of components, the transportation cost amounts to INR 200. To ensure smooth operations the firm maintains an inventory of second hand computers. The costs involved in maintaining the storage is approximately 15% of the inventory held. Mr. Dadu was concerned with the rising cost for maintaining inventory. He called Mayank, and asked him to manage inventory to optimise the costs. Mayank showed Mr. Dadu his work and impressed him. However, owner was also concerned with scouting of new supplier, as the existing supplier’s contract was likely to end soon. Mr Dadu was looking out for new stakeholders who can supply at more attractive terms. M/s Venkat Hardwares and M/s Mathur Systems are the major suppliers of used computer components and have shown interest to supply . Venkat Hardwares has offered a discount of 2% on the price of material if for an order of 150 units and Mathur Systems is offering a discount of 6% for an order of 200 units. Mr. Dadu asked Mayank to consider the two offers and meet him after evaluating the proposals. After few months Mr. Dadu found that the supplier is not able to replenish the inventory on time. He is worried about the time gap between order placed and order received. He felt the delay may interrupt the assembling process and can affect the business of the firm. Once again he asked Mayank to prepare a proposal to minimize the chances of stockout and inventory costs. Mayank meets employees of the firm and gets an estimate of the daily usage of the raw material and the time required by the suppliers to meet the order. He finds employees have different opinion about the same. He asks them to submit their estimates. He collects the data and comes to the conclusion that around one-fourth of the employees feel 240 units of raw material are used each day and it takes 20 days to replenish the inventory, once order is made. One-fourth of the employees feel on an average 360 units of raw material is consumed everyday and firm receives the raw material within 40 days of order placed. The rest of the employees feel that it takes around a month to get the raw material and firm consumes 300 units of raw material everyday. Mayank also found that the stock out cost for the firm is INR 3000 per unit. He needs to meet Mr. Dadu next day with his recommendations.

Assignment questions: 1. Find out the EOQ for CCC. 2. Assist Mayank to choose among the proposal of M/s Venkat Hardwares and M/s Mathur Systems. 3. Find out the normal daily consumption of raw material by CCC. 4. Help Mayank to decide the optimum level of safety stock.

Prof. Garima Sisodia, IBS, Hyderabad prepared this case intended to be used as the basis for class room discussion rather than to illustrate either effective or ineffective handling of a management situation. Feedback and suggestions for improvement of the case are welcome at [email protected]