Craftwood Furniture Company is a U.S.–based furniture manufacturer that offshored all of its
actual manufacturing operations to China about a decade ago. It set up a distribution center in
Hong Kong, from which the company ships its items to the United States on container ships.
The company learned early on that it could not rely on local Chinese freight forwarders to
arrange for sufficient containers for the company’s shipments, so it contracted to purchase
containers from a Taiwanese manufacturer and then sell them to shipping companies at the
U.S. ports the containers are shipped to. Craftwood needs 715 containers each year. It costs
$265 to hold a container at its distribution center, and it costs $6,000 to process and receive an
order for the containers. The cost of not having sufficient containers and delaying a shipment
is $14,000 per container. Determine the optimal order size, minimum total annual inventory
cost, and maximum shortage level.
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