Orion is a global company that sells
copiers. Orion currently sells 10 variants of a copier with all inventory kept
in finished-goods form. The primary component that differentiates the copiers
is the printing subassembly. An idea being discussed is to introduce
commonality in the printing subassembly so that final assembly can be postponed
and inventories kept in component form. Currently each copier costs $ 1000 in
terms of components. Introducing commonality in the print subassembly will
increase component costs to $ 1025. One of the 10 variants represents 80
percent of the total demand. Weekly demand for this variant is normally
distributed with a mean of 1000 and a standard deviation of 200. Each of the
remaining nine variants has a weekly demand of 28 with a standard deviation of
20. Orion aims to provide a CSL of 95 percent. Replenishment lead time for
components is four weeks. Copier assembly can be completed in a matter of
hours. Orion manages all inventories using a continuous review policy and uses
a holding cost of 20 percent. a. How much safety inventory of each
variant must Orion keep without component commonality? What is the annual
holding cost? b. How much safety inventory must be
kept in component form if Orion uses common components for all variants? What
is the annual holding cost? What is the increase in component cost using
commonality? Is commonality justified across all variants? c. At what cost of commonality will
complete commonality be justified? d. Now consider the case in which
Orion uses component commonality for only the nine low- demand variants. How
much reduction in safety inventory does Orion achieve in this case? What are
the savings in terms of annual holding cost? Is this more restricted form of
commonality justified? e. At what cost of commonality will
commonality across the low volume variants be justified?