Currently the unit cost of one standard coffee container is £14.50 and in total the company generally gets through about 200 containers each fortnight (2 weeks).
The HT company trades 52 weeks a year. The cost of placing an order with KCS is £40 and the
holding cost is known to be £9 per container per year.
The coffee is delivered by KCS to HT's central warehouse in Swindon and from there it is
shipped with other supplies to the 45 HT restaurants - at a yearly cost of £7,500. Occasionally
deliveries are late and restaurants run out of coffee for a few days.
The HT Finance Director had found that the total costs of procuring coffee were currently
£94,000 p. a. with no consistent order policy i. e. HT purchase orders with KCS were placed in a
haphazard manner in terms of frequency and amounts ordered.
The Director had two ideas as to how they could improve the terms of their contract with KCS.
The first is a suggestion that ordering would be more efficient if the Economic Order Quantity
(EOC) method was being used.