Question 3Best Technology (BT) is a leading manufacturer of adhesives used in a variety of industrialapplications. BT produces two types of industrial adhesives in its Texas plant for the US market. Thetwo types of adhesives are produced using the same production technology and equipment. Theyhave identical characteristics except their adhesive strengths which are determined by the lastproduction step of mixing with different chemicals. The demands for the two types of adhesives areindependent and their weekly demands in the US distribution centre (DC) are approximately normallydistributed with their means and standard deviations given below.AdhesivesType I AdhesiveType II AdhesiveMean (kg)Standard Deviation (kg)9,00010,0004,0003,000The replenishment lead time of the adhesives from BT's manufacturing plant to the US DC is 4 weeks.The current adhesive production cost is $100/kg, the cost of shipping the adhesive from the plant tothe DC is $20,000, and the annual holding cost rate is 50%. BT has decided to use a (Q,R) levelpolicy to control the inventory at the DC to achieve its target service of less than 5% stock-outprobability.(a) Increasing competition has led to a dramatic increase in the number of new products, modelsand options launched in both consumer and industrial markets. Why does the increase makesupply chains more difficult to manage?(b) Determine the amount of safety stock and the annual inventory cost of the two types ofadhesives kept in the DC.(c) As the two types of adhesives have recently been classified as dangerous goods, they have tobe shipped from the plant to the US DC in specialized chemical tank containers of size of 20,000kg. Each tank container can store only one type of adhesive and the shipment size for eachadhesive type is at most 20,000 kg. To reduce the inventory cost, BT's logistics manager hasproposed to carry out the last production step at the DC instead of at the plant. According to themanager's proposal, the work-in-process inventory is shipped from the plant using a specializedchemical tank container and the time required for the last production step at the DC is negligible.Assume that carrying out the last production step at the DC will increase the production cost ofthe adhesives from $100/kg to $101/kg.i)Determine the annual inventory cost of the two types of adhesives kept in the DC for thecase of carrying out the last production step at the Texas plant.ii)Determine whether BT should relocate the last production step to the DC.Suppose that the actual annual holding cost rate, I, is unknown, and BT's estimatediii)annual holding cost rate is equal to axI where a is a non-negative real number. Find thepercentage increase in total inventory cost if BT's order quantity is much bigger than theamount of safety stock.

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Inventory optimization refers to the strategic management and control of a company's inventory to…