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9. Safety stock is inventory held in excess of expected demand to reduce the risk of stockout presented by variability in either lead time or demand rates. 10. Safety stock is large when large variations in lead time and/or usage are present. Conversely, small variations in usage or lead time require small safety stock. Safety stock is zero when usage and lead time are constant, or when the service level is 50 percent (and hence, z = 0). 11. Service level can be defined in a number of ways. The text focuses mainly on the probability that demand will not exceed the amount on hand. Other definitions relate to the percentage of cycles per year without a stockout, or the percentage of annual demand satisfied from inventory. (This last definition often tends to confuse students in my experience.) Increasing the service level requires increasing the amount of safety stock. 12.The A-B-C approach refers to the classification of items stocked according to some measure of importance (e.g., cost, cost-volume, criticalness, cost of stockout) and allocating control efforts on that basis. 13. In effect, this situation is a quantity discount case with a time dimension. Hence, buying larger quantities will result in lower annual purchase costs, lower ordering costs (fewer orders), but increased carrying costs. Since it is unlikely that the compressor supplier announces price increases far in advance, the purchasing agent will have to develop a forecast of future price increases to use in determining order size. Unlike the standard discount approach, the agent may opt to use trial and error to determine the best order size, taking into account the three costs (carrying, ordering and purchasing). In any event, it is reasonable to expect that a larger order size would be more appropriate; although obsolescence may also be a factor. 14. Annual carrying costs are determined by average inventory. Hence, a decrease in average inventory is desirable, if possible. Average inventory is Q o/2, and Qo decreases (run size model) if setup cost, S, decreases. 15. The Single-Period Model is used when inventory items have a limited useful life (i.e., items are not carried over from one period to the next). 16. Yes. When excess costs are high and shortage costs are low, the optimum stocking level is less than expected demand. 17.A company can reduce the need for inventories by: a. using standardized parts b. improved forecasting of demand c. using preventive maintenance on equipment and machines d. reducing supplier delivery lead times and delivery reliability e. utilizing reliable suppliers and improving the relationships in the supply chain f. restructuring the supply chain so that the supplier holds the inventory g. reducing production lead time by using more efficient manufacturing methods h. developing simpler product designs with fewer parts.
Taking Stock
1. a. If we buy additional amounts of a particular good to take advantage of quantity discounts, then we will save money on a per unit purchasing cost of the item. We will also save on ordering cost because since we bought a larger quantity, we will not have to order this item as frequently. However, as a result of ordering larger quantity, we will have to carry larger inventory in stock, which in turn will result in an increase in inventory holding cost. b. If we treat holding cost as a percentage of the unit price, as the unit price increases, so will the holding cost, and as a result, if we are using the EOQ approach, we will have to place a smaller order, resulting in a lesser inventory. On the other hand, if we use a constant amount of a holding cost, the inventory decisions will not be affected by the changes in unit cost (price) of the item.
13-2
c. Conducting a cycle count once a quarter instead of once a year will result in more frequent counting, which will result in an increase in labor and overhead costs. However, the more frequent counting would also lead to less errors in inventory accuracy and more timely detection of errors, which in turn would lead to timely deliveries to customers, less work in process inventory, more efficient operations, improved customer service, and assurance of material availability. 2. In making inventory decisions involving holding costs, setting inventory levels and deciding on quantity discount purchases, the materials manager, plant manager, production planning and control manager, the purchasing manager, and in some cases the planners who work in production planning and control or purchasing departments should be involved. The level and the nature of involvement will depend on the organizational structure of the company and the type of product being manufactured or purchased. The technology has had a tremendous impact on inventory management. The utilization of bar coding has not only reduced the cost of taking physical inventory but also enabled real time updating of inventory records. The satellite control systems available in trucks and automobiles has enabled companies to determine and track the location of in-transit inventory. H = $2/month S = $55 D1 = 100/month (months 16) D2 = 150/month (months 712) a.
3.
7.
Q0 =
2DS H
D1 : Q 0 = D2 : Q0 =
b. The EOQ model requires this. c. Discount of $10/order is equivalent to S 10 = $45 (revised ordering cost) 16 TC74 = $148.32
50 100 ( 2) + ( 45) = $140 * 2 50 100 100 ( 2) + ( 45) = $145 2 100 150 100 ( 2) + ( 45) = $180 2 150
TC 50 =
TC 100 = TC 150 =
712 TC91 =
TC 50 =
$181.66
50 150 ( 2) + ( 45) = $185 2 50 100 150 ( 2) + ( 45) = $167.5 * 2 100 150 150 ( 2) + ( 45) = $195 2 150
TC100 = TC150 =
13-3
8.
TC=
TC4000 =
b. Current: For
Q=
2DS So 2,700 = H
2(27,000)S .18
Solving, S = $24.30 c. the carrying cost happened to increase rather dramatically from $.18 to approximately $.3705. 2DS 2(27,000)50 Q= = 2,700 = H H Solving, H = $.3705 9. p = 5,000 hotdogs/day u = 250 hotdogs/day 300 days per year S = $66 H = $.45/hotdog per yr. a.
Q0 = 2DS H p = p u 2(75,000)66 .45 5,000 = 4,812.27 [round to 4,812] 4,750
b. D/Qo = 75,000/4,812 = 15.59, or about 16 runs/yr. c. run length: Qo/p = 4,812/5,000 = .96 days, or approximately 1 day 10. p = 50/ton/day u = 20 tons/day 200 days/yr.
13-4
I max =
Average is
c. Run length =
I max D H+ S 2 Q
TCorig. TCrev.
= $1,549.00 = $ 774.50
(250 x 80 = 20,000)
848 80/day = 10.6 days - 1.0 setup 9.6 days No, because present demand could not be met. e. 1) Try to shorten setup time by .40 days. 2) Increase the run quantity of the new product to allow a longer time between runs. 3) Reduce the run size of the other job.]
13-5
In order to be able to accommodate a job of 10 days, plus one day for setup, there would need to be an11 day supply at Imax, which would be 880 units on hand. Solving the following for Q, we find: Q Q I max = ( p u ) = (200 80) = 880 units P 200 Q = 1,467. Using formula 13-4 for total cost, we have TC @ 1,467 units = $8,489.98 TC @ 1,414 units = $8,483.28 Additional cost = $6.70
f.
12.
p = 800 units per day d = 300 units per day Q0 = 2000 units per day a. Number of batches of heating elements per year =
75,000 =37.5 batches per year 2,000
b. The number of units produced in two days = (2 days)(800 units/day) = 1600 units The number of units used in two days = (2 days) (300 units per day) = 600 units Current inventory of the heating unit = 0 Inventory build up after the first two days of production = 1,600 600 = 1,000 units Total inventory after the first two days of production = 0 + 1,000 = 1,000 units. c. Maximum inventory or Imax can be found using the following equation:
p d I max = Q0 p 800 300 = (2,000)(.625) =1,250 units = 2 ,000 800 I max 1,250 = = 625 units 2 2
Average inventory =
Setup time per batch = day Total time per batch = 2.5 + 0.5 = 3 days Since the time of production for the second component is 4 days, total time required for both components is 7 days (3 + 4). Since we have to make 37.5 batches of the heating element per year, we need (37.5 batches) x (7 days) = 262.5 days per year. 262.5 days exceed the number of working days of 250, therefore we can conclude that there is not sufficient time to do the new component (job) between production of batches of heating elements. An alternative approach for part d is: The max inventory of 1,250 will last 1250/300 = 4.17 days 4.17 .50 day for setup = 3.67 days. Since 3.67 is less than 4 days, there is not enough time. 13. D = 18,000 boxes/yr.
13-6
Since this quantity is feasible in the range 2000 to 4,999, its total cost and the total cost of all lower price breaks (i.e., 5,000 and 10,000) must be compared to see which is lowest. TC2,400 = TC5,000 = TC10,000 =
2,400 18,000 (.60) + ($96) +$1.20(18,000) = $23,040 2 2,400 5,000 18,000 (.60) + ($96) +$1.15(18,000) = $22,545.6 [lowest ] 2 5,000 10,000 18,000 (.60) + ($96) +$1.10(18,000) = $22,972.80 2 10,000
Lowest TC
TC
2,400
5,000
10,000 Quantity
b. 14.
a. S = $48 D = 25 stones/day x 200 days/yr. = 5,000 stones/yr. Quantity 1 399 400 599 600 + TC490 = TC600 = Unit Price $10 9 8 a. H = $2
Q=
2DS = H
2(5,000) 48 = 489.90 2
13-7
Quantity
(Feasible) Compare total costs of the EOQ at $9 and lower curves price break: Q D TC = (.30P) + (S) +PD 2 Q TC422 = TC600 = 422 [.30($9)] + 2 5,000 ($48) + $9(5,000) = $46,139 422
600 5,000 [.30($8)] + ($48) + $8(5,000) = $41,120 2 600 Since an order quantity of 600 would have a lower cost than 422, 600 stones is the optimum order size. c. ROP = 25 stones/day (6 days) = 150 stones. 15. D = 4,900 seats/yr. H = .4P S = $50 Range 0999 1,0003,999 4,0005,999 6,000+ P $5.00 4.95 4.90 4.85 H $2.00 1.98 1.96 1.94 Q 495 497 NF 500 NF 503 NF
Compare TC495 with TC for all lower price breaks: 495 4,900 TC495 = ($2) + ($50) + $5.00(4,900) = $25,490 2 495 1,000 4,900 TC1,000 = ($1.98) + ($50) + $4.95(4,900) = $25,490 2 1,000 4,000 4,900 TC4,000 = ($1.96) + ($50) + $4.90(4,900) = $27,991 2 4,000 6,000 4,900 TC6,000 = ($1.94) + ($50) + $4.85(4,900) = $29,626 2 6,000 Hence, one would be indifferent between 495 or 1,000 units
TC
1,000
4,000 Quantity
6,000
16.
13-8
Q13.6 = Q13.8 =
2( 9 ,600 )( 40 ) = 475.27 ( not feasible ) (.25 )( 13.6 ) 2( 9 ,600 )( 40 ) = 471.81 (.25 )( 13.8 )
9 ,600 471.81 TC 471.81 = ( 40 ) + [( 13.8 )( 9 ,600 )] 3.45 + 471.81 2 TC 471.81 = 813.88 + 813.87 + 132 ,480 TC 471.81 = $134 ,107.75 9 ,600 500 TC 500 = ( 40 ) + [( 13.6 )( 9 ,600 )] (.25 )( 13.6 ) + 2 500 TC 500 = 768 + 850 + 130 ,560 TC 500 = $132 ,178 *
For Supplier B:
Q13.7 = 2( 9 ,600 )( 40 ) = 473.53 (.25 )( 13.7 )
9 ,600 473.53 TC 471.81 = ( 40 ) + [( 13.7 )( 9 ,600 )] (.25 )( 13.7 ) + 473.53 2 TC 471.81 = 810.93 + 810.92 + 131,520 TC 471.81 = $133 ,141.85
Since $132,178 < $133,141.85, choose supplier A. The optimal order quantity is 500 units.
17. D = 3600 boxes per year Q = 800 boxes (recommended) S = $80 /order H = $10 /order If the firm decides to order 800, the total cost is computed as follows:
D Q TC = H + S +( P * D) 2 Q 800 3,600 TC Q =800 = $10 + $80 +(3,600 x 1.1) 2 800 TC Q =800 = 4,000 +360 +3,960 =8,320
Even though the inventory total cost curve is fairly flat around its minimum, when there are quantity discounts, there are multiple U shaped total inventory cost curves for each unit price depending on the unit price. Therefore when the quantity changes from 800 to 801, we shift to a different total cost curve. If we take advantage of the quantity discount and order 801 units, the total cost is computed as follows:
D Q TC = H + S + ( P * D) Q 2 801 3,600 TC Q =801 = $10 + $80 + (3,600 x 1.0) 2 801 TC Q =801 = 4,005 +359.55 +3,600 = 7,964.55
13-9
The order quantity of 801 is preferred to order quantity of 800 because TC Q=801 < TCQ=800 or 7964.55 < 8320.
EOQ = 2DS = H 2(3,600)(80) = 240 boxes 10
D Q TC EOQ = H + S +( P * D) Q 2 240 3,600 TC EOQ = $10 + $80 +(3,600 x 1.1) 2 240 TC EOQ =1,200 +1,200 +3,960 = 6,360
18.
The order quantity of 800 is not around the flat portion of the curve because the optimal order quantity (EOQ) is much lower than the suggested order quantity of 800. Since the EOQ of 240 boxes provides the lowest total cost, it is the recommended order size. Daily usage = 800 ft./day Lead time = 6 days Service level desired: 95 percent. Hence, risk should be 1.00 .95 = .05 This requires a safety stock of 1,800 feet. ROP = expected usage + safety stock = 800 ft./day x 6 days + 1,800 ft. = 6,600 ft.
19.
Expected demand during LT = 300 units dLT = 30 units a. Z = 2.33, ROP = exp. demand + ZLT 300 + 2.33 (30) = 369.9 = 370 units b. 70 units (from a.) c. smaller Z = less safety stock ROP smaller: LT demand = 600 lb. LT = 52 lb. risk = 4% Z = 1.75 a. ss = ZLT = 1.75 (52 lbs.) = 91 lbs. b. ROP = Average demand during lead time + safety stock ROP = 600 + 91 = 691 lbs. c. With no safety stock risk is 50%. = 21 gal./wk. = 3.5 gal./wk. = 2 days = 90 percent requires z = +1.28
20.
21. d LT SL a.
Average demand per day = 21 gallons / 7days per week = 3 gallons = Average demand during lead time = (3 gallons) (2 days) = 6 gallons
13-10
L = Z=
2 (3.5) =1.871 7
Z is approximately 1.07. From Appendix B, Table B, the lead time service level is .8577. Risk of stockout is 1 - . 8577 = .1423 c. 1 day after From a, ROP = 8.39 2 more days on hand = ROP 2 gal. = 6.39 P (stockout)= ? d = 21 gal./wk. d = 3.5 gal./wk. 22. d ROP LT ss Risk 6.39 = 21 (2/7) + Z
solving, Z =
2/7
(3.5)
From Appendix B, Table B, Z=.21 gives a risk of 1 .5832 = .4168 or about 42%
= 30 gal./day = 170 gal. ss = ZLT = 50 = 4 days = 50 gal. = 9% Z = 1.34 Solving, LT = 37.31 3% Z = 1.88 x 37.31 = 70.14 gal. ROP = d x LT + Z d LT 625 = 85 x 6 + Z (85) 1.1 Z = 1.23 10.93% .1093 approx. 11% ROP = dLT + Z LT d 2 + d LT 2 = 12 (4) + 1.75 4(4) +144(1) = 48 + 1.75 (12.65) = 48 + 22.14 = 70.14
2
23.
24.
25.
LT = 3 days S = $30 D = 4,500 gal H = $3 360 days/yr. 4 ,500 d= = 12.5 / day 360 d = 2 gal. Risk = 1.5% Z = 2.17 a. Qty. 1 399 400 799 800+ Unit Price $2.00 1.70 1.62 Qo =
2DS = 300 H
TC = Q/2 H + D/Q S + PD
13-11
TC300 = 150 (3) + 15 (30) + 2(4,500) = $9,900 TC400 = 200(3) + 11.25(30) + 1.70(4,500) = $8,587.50* TC800 = 400(3) + 5.625(30) + 1.62(4,500) = $8,658.75 b. ROP = d LT + Z LT d = 12.5 (3) + 2.17 3 (2) = 37.5 + 7.517 = 45.02 gal. 26. = 5 boxes/wk. = .5 boxes/wk. = 2 wk. = $2 = $.20/box D = .5 boxes/wk. x 52 wk./yr. = 26 boxes/yr. 2DS 2( 260) 2 Q0 = = = 72.11 [ round to 72] H .20 b. ROP = d (LT) + z LT (d)
z= ROP d ( LT) LT (d ) = 12 5( 2) 2 (.5) = 2.83
d d LT S H a.
Thus, 36 = 5(7 + 2) + z(.5) 7 + 2 12 Solving for z yields z = +2.00 which implies a risk of 1.000 .9772 = .0228. 27.
d = 80 lb. d = 10 lb. LT = 8 days LT = 1 day SL = 90 percent, so z = +1.28
a. ROP = d () + z
LT 2 d + d 2 LT
= 80 (8) + 1.28 8(10) 2 +80 2 (1) 2 = 640 + 1.28 (84.85) = 748.61 [round to 749] b. E(n) = E(z) dLT = .048(84.85) = 4.073 units 28. D = 10 rolls/day x 360 days/yr. = 3,600 rolls/yr. LT = 3 days H = $.40/roll per yr. d = 2 rolls/day S = $1 a. 2 DS 2(3, 600)1 Q0 = = = 134.16 [round to 134]
d = 10 rolls/day
.40
b. SL of 96 percent requires z = +1.75 ROP = d (LT) + z LT (d) = 10(3) + 1.75 (3) (2) = 36.06 [round to 36] c. E(n) = E(z) LT = .016( LT )(d) = .016
3
(2) = .055/cycle
13-12
E(N) = E(n)
29.
Qo = 179 cases E(z) LT Q E(z) LT .99 = 1 179 Solving, E(z) = 0.358 From Table 123, Z = 0.08 Hence, the probability of a stockout is 1-.8577=.1423. SLannual = 1
dLT = 80, LT = 5
SLannual = 98% a. SLannual = 1 (z) dLT Q dLT = LT d = 5 (14) = 9.90 b. E(n) = E(z) dLT 5 = E(z)9.90 E(z) = .505 z = .20 SL = .4207 31. FOI
.02 =
Q = d (OI + LT) + zd OT + LT A = d (16) + 2.05d 16 A Cycle 1 2 3 & 2 = 3/day P35 D = 3,500 units
d = 70 units/wk.
SL = .98 OI = 14 days LT = 2 days D = 40/day 32. d = 40/day 50 wk./yr. P34 D = 3,000 units
d = 60 units/wk.
16 16 16
42 = 622.6 623 units 8 = 656.6 657 units 103 = 561.6 562 units
13-13
ROPP34 = d x LT+ z ROPP34 = 60(2) + 1.96 33. a. Item H4-010 H5201 P6-400 P6-401 P7-100 P9-103 TS-300 TS-400 TS-041 V1-001 Item H4-010 H5-201 P6-400 P6-401 P7-100 P9-103 TS-300 TS-400 TS-041 V1-001
Annual $ volume 50,000 240,800 279,300 174,000 56,250 165,000 945,000 1,800,000 16,000 132,400 Estimated annual demand 20,000 60,200 9,800 14,500 6,250 7,500 21,000 45,000 800 33,100
Classification C B B B C C A A C C Ordering cost 50 60 80 50 50 50 40 40 40 25 Unit holding cost ($) .50 .80 8.55 3.60 2.70 8.80 11.25 10.00 5.00 1.40 EOQ 2,000 3,005 428 635 481 292 386 600 113 1,087
b.
34.
Cs = Rev Cost = $4.80 $3.20 = $1.60 Ce = Cost Salvage = $3.20 $2.40 = $.80 Cs $1.60 1.6 SL = = = = .67 Cs + Ce $1.60 + $.80 2.4 Since this falls between the cumulative probabilities of .63(x = 24) and .73(x = 25),
13-14
x Demand 19 20 21
22 23 24 25 26 27 . .
35.
Cs = $88,000 Ce = $100 + 1.45($100) = $245 Cs $88,000 a. SL = = = .9972 Cs + Ce $88,000 + $245 Using the Poisson probabilities, the minimum level stocking level that will provide the desired service is nine spares (cumulative probability = .998).
[From Poisson Table with = 3.2] x Cum. Prob. 0 .041 1 .171 2 .380 3 .603 4 .781 5 .895 6 .955 7 .983 8 .994 9 .998 . . . .
b.
SL = .041 =
Cs Cs + Ce Cs C s + 245
Carrying no spare parts is the best strategy if the shortage cost is less than or equal to $10.47 ( C s 10.47 ). 36. Cs = Rev Cost = $5.70 $4.20 = $1.50/unit Ce = Cost Salvage = $4.20 $2.40 = $1.80/unit $1.50 Cs $1.50 SL = = = = .4545 $3.30 Cs + Ce $1.50 + $1.80 The corresponding z = .11 So = d z d = 80 .11(10) = 78.9 lb.
d = 80 lb./day
d = 10 lb./day
37.
d = 6 qt./day S Ce = $.35/qt Cs = ? z=
d
= 49 40 = 1.5 6
13-15
S = 49 qt.
Cs Cs Thus, .9332 = Cs + Ce Cs + $.35 Solving for Cs we find: .9332(Cs + .35) = Cs; Cs = $4.89/qt. SL = Customers may buy other items along with the strawberries (ice cream, whipped cream, etc.) that they wouldnt buy without the berries. 38. Cs = Rev Cost = $12 $9 = $3.00/cake Ce = Cost Salvage = $9 ($9.00) = $4.50/cake Demand is Poisson with mean of 6 Cs $3.00 SL = = = .40 Cs + Ce $3.00 + $4.50 Since .40 falls between the cumulative probability for demand of 4 and 5, the optimum stocking level is 5 cakes.
[From Poisson Table with = 6.0] Demand Cum. Prob. 0 .003 1 .017 2 .062 3 .151 4 .285 .40 5 .446 6 .606 . . . . . .
39.
Cs = $.10/burger x 4 burgers/lb. = $.40/lb. Ce = Cost Salvage = $1.00 $.80 = $.20/lb. Cs $.40 SL = = = .6667. Cs + Ce $.40 + $.20 The appropriate z is +.43. So = + z = 400 + .43(50) = 421.5 lb. Cs = $10/machine Ce = ? S = 4 machines Demand Freq. 0 .30 1 .20 2 .20 3 .15 4 .10 5 .05 1.00
40.
400 421.5
$10 .95. $10 + Ce Setting the ratio equal to .85 and solving for Ce yields $1.76, which is the upper end of the range. Setting the ratio equal to .95 and again solving for Ce , we find Ce = $.53, which is the lower end of the range.
13-16
b. The number of machines should be decreased: the higher excess costs are, the lower SL becomes, and hence, the lower the optimum stocking level. c. For four machines to be optimal, the SL ratio must be between .85 and .95, as in part a. Setting the ratio equal to .85 yields the lower limit: Cs .85 = Solving for Cs we find Cs = $56.67. Cs + $10 Setting the ratio equal to .95 yields the upper end of the range: Cs .95 = Solving for Cs we find Cs = $190.00 Cs + $10 41. a. Ratio Method # of spares 0 1 2 3 Probability of Demand 0.10 0.50 0.25 0.15 Cumulative Probability 0.10 0.60 0.85 1.00
Cs = Cost of stockout = ($500 per day) (2 days) = $1000 Ce = Cost of excess inventory = Unit cost Salvage Value = $200 $50 = $150
SL =
Since 86.9% is between cumulative probabilities of 85% and 100%, we need to order 3 spares. b. Tabular Method
Stocking Level 0 1 2 3 Demand = 0 Prob. = 0.10 $0 .10(1)($150)=$15 .10(2)($150)=$30 .10(3)($150)=$45 Demand = 1 Prob. = 0.50 .50(1)($1000)=$500 $0 .50(1)($150)=$75 .50(2)($150)=$150 Demand = 2 Prob. = 0.25 .25(2)($1000)=$500 .25(1)($1000)=$250 $0 .25(1)($150)=$37.50 Demand = 3 Prob. = 0.15 .15(3)($1000)=$450 .15(2)($1000)=$300 .15(1)($1000)=$150 $0 Expected Cost $1,450 $565 $255 $232.50
13-17
42.
a. Ratio Method: Demand and the probabilities for the cases of wedding cakes are given in the following table. Demand 0 1 2 3 Probability of Demand 0.15 0.35 0.30 0.20 Cumulative Probability 0.15 0.50 0.80 1.00
Cs = Cost of stockout = Selling Price Unit Cost = $60 $33 = $27 Ce = Cost of excess inventory = Unit Cost Salvage Value = $33 $10 = $23
SL =
Cs 27 = = .54 C s + Ce 27 + 23
Since the service level of 54% falls between cumulative probabilities of 50% and 80%, the supermarket should stock 2 cases of wedding cakes. a. Tabular Method
Stocking Level 0 1 2 3 Demand = 0 Prob. = 0.15 $0 .15(1)($23)=$3.45 .15(2)($23)=$6.90 .15(3)($23)=$10.35 Demand = 1 Prob. = 0.35 .35(1)($27)=$9.45 $0 .35(1)($23)=$8.05 .35(2)($23)=$16.10 Demand = 2 Prob. = 0.30 .30(2)($27)=$16.20 .30(1)($27)=$8.10 $0 .30(1)($23)=$6.90 Demand = 3 Prob. = 0.20 .20(3)($27)=$16.20 .20(2)($27)=$10.80 .20(1)($27)=$5.40 $0 Expected Cost $41.85 $22.35 $20.35 $33.35
The supermarket should stock 2 cases of wedding cakes. 43. Cs = $99, Ce = $200 SL = 99___ 99 + 200 = 0.3311. z = 0.44.
Overbook: 18 0.44(4.55) = 15.998, or 16 tickets. 44. Mean usage = 4.6 units/day Standard dev. = 1.265 units/day LT = 3 days ROP = 18 Using equation 12-13: 18 = 4.6(3) + z(1.265)3 Solving, z = 1.92 which gives a service level of 97.26%.
13-18
The weekly total cost based on optimal order quantity EOQ is given below:
d Q 89 267 TC EOQ = Q S + 2 H = 267 32 + 2 .08 TC EOQ =10.67 +10.68 = 21.35 / week
The weekly total cost based on six-week fixed order interval (FOI) order quantity is given below:
d Q 89 534 TC FOI = Q S + 2 H = 534 32 + 2 .08 TC FOI = 5.33 + 21.36 = 26.69 / week
Weekly savings of using EOQ rather than 6-week FOI is 26.69 21.35 = $5.34 The annual savings = (52 weeks) ($5.34 /week) = $277.68 2. The total annual savings as a result of switching from six-week FOI to EOQ are relatively small and switching to the optimal order quantity may not be warranted. However, even though the absolute value of the savings is relatively small, the percentage of savings is approximately 25% (5.34 / 21.35). Therefore if FOI approach is used with other parts or components as well, the total potential loss may be significant.
13-19
It is expected demand between orders and lead time + safety stock inventory on hand Q = 5 (3+2) + 1.64 (3.5) (3 + 2) 3 = 25 + 13 3 = 35 (Therefore, 18 2-packs.) 4. 12 = 5 x 2 + z (3.5) (1.41) 12 = 10 + z (4.935) 2 / 4.935 = z (4.935) / 4.935 Z = 0.41 Service Level = 0.6554 1 0.6554 = 0.3446 Therefore, the risk for stockout is 34.46% which is high
g. Bake h. Sell to customers The company can improve quality at each step by monitoring output more carefully and training and education of the employees. 3. The basic ingredients can be purchased using either fixed order interval or fixed order quantity models. EOQ production lot size model is most appropriate for deciding the size of production quantity. 4. If there is a bagel-making machine at each store, the company would have to invest in more machinery, more space for production and storage, and more worker training for the production of bagels. However, the lead time to make the bagels will be shortened. The shorter lead time will provide faster, more flexible response to customer demands and fresher bagels.
13-21
Q B 2
(Q B) (Q B ) d 2 (Q B ) 2 2d
In other words, an average of 150 units are carried in inventory for 12 days and zero units are carried for 8 days (shortage period). Therefore, total number of unit days of inventory during the complete order cycle is (150)(12) = 1800. Since there are a total of 20 days in the complete order cycle, the average inventory can be computed by dividing the total number of unit days of inventory by the number of days in the inventory cycle. In this example, the average inventory is equal to 1,800/20 or 90 units. Therefore, the average inventory can be computed by using the following formula:
(Q B ) 2 2d Average inventory = Q d Average Inventory = (Q - B)2 2Q
Using a similar logic, we can also develop the average backlog formula. The dealership will experience shortage (backorders) for 8 days during the order cycle. The average amount of backorder on a given shortage day is B/2. Based on this information, the total number of backorder unit days can be computed using the following equation: (t 2) (B/2) = (B/D)(B/2) = B2 /2D. In our example, there are 8 days of a planned shortage period. During this period, an average of 200/2 = 100 units of backorders are realized. Therefore, the total number of backorder unit days during the order cycle is (8)(100) = 800 units. Since there are a total of 20 days in the order cycle, the average backorder quantity for the complete order cycle can be determined by dividing the total number of backorder unit days by the number of days in the complete inventory cycle. In this example, using the above equation, we obtain an average backorder quantity of 800/20 = 40 units. The general equation for the average backorder quantity is:
B2 Average backorder = 2d Q d Average backorder = B2 2Q
Annual inventory carrying cost is still calculated by multiplying the average inventory with the inventory carrying cost per unit per year. The formula for the annual ordering (setup) cost is the same as it was for the basic EOQ model. The annual backorder cost is determined by multiplying the average backorder quantity with the backorder cost per unit per year. The annual inventory carrying cost is given by:
(Q B ) 2 H 2Q
The annual ordering and backordering costs are given by the following respective formulas:
D S Q B2 CB 2Q
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Therefore, the total annual inventory cost (TC) can be expressed by summing the annual inventory carrying cost, annual ordering cost and the annual backordering cost as shown in the following formula:
TC = (Q B ) 2 D B2 H+ S+ CB 2Q Q 2Q
Taking the first total derivative of the above total cost formula with respect to Q and setting the resulting equation to zero and solving for Q will result in the following optimal quantity (Q*) and optimal backorders (planned shortages) (B*) formulas:
Q* = 2 DS H + C B H CB
H B* = Q * H +B
Q Stockout B t2 Time
t1 =
Example:
QB
T = Q/d
XYZ Company distributes a major part for the F15 fighter jets. Due to the very high holding cost, the company wants to implement a model with planned shortages. The annual demand is 78,000 and the company operates 300 days per year. The annual carrying rate is 10% of the item cost and the unit cost of this item is $1,000. The setup cost per batch is estimated at $500. a. b. c. d. e. Determine the optimal order quantity and total annual inventory cost (setup cost + carrying cost) using the basic EOQ model with no backorders. If each unit backordered costs the company $200 per unit per year, what would be the optimal order quantity and the optimal size of the planned backorder? Determine the annual carrying cost, the annual setup cost, the annual backordering cost and the annual total inventory cost for the planned shortage model used in part b. Determine the values of t1, t2 and T in days. Should the company adopt the planned backorder model of part b or the basic EOQ model of part a which does not allow backorders?
D = 81,000 units S = $500 d = 81,000/300 days = 27 units per day. H = ($1,000) (.10) = $100 CB = $200
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a.
Q* =
2DS H
Q* =
Q* =
= 24,495.77
c.
D 81,000 Annual setup cost = (S) = (500) Q 1,102.3 = 36,741.35 B2 Annual backorder cost = 2Q C B = 367.4332 ( 200) =12,247.55 2(1,102.3)
Let TC = Total annual inventory cost HC = annual inventory holding cost SC = annual setup cost BC = annual backordering cost TC = HC + SC + BC = 24,495.77 + 36,741.35 + 12,247.55 = 73,485.07 d.
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d= T=
81,000 = 27 300 Q 1,102.3 = = 40.83 days d 27 Q B 1,102.3 367.43 = = 27.22 days d 27 B * 367.43 = =13.61 days d 27
t1 = t2 =
e.
The model with planned backorders is preferred because the total annual inventory cost of the basic inventory model is substantially higher than the total annual inventory cost of the planned backorder model. TCbasic EOQ = 90,000 TCbackorder = 73,485.07 90,000 73,485.07 = 16,514.93 The total cost savings equal 18.4%
Problems The manager of an inventory system believes that inventory models are important decision-making aids. Although the manager often uses an EOQ policy, he has never considered a backorder model because of his assumption that backorders are bad and should be avoided. However, with upper managements continued pressure for cost reduction, you have been asked to analyze the economics of a backordering policy for some products that can possibly be backordered. For a specific product with D = 800 units per year, C0 =$150, H = $10, and Cb = $20, what is the economic difference in the EOQ and the planned shortage or backorder model? If the manager adds constraints that no more than 35% of the units may be backordered and that no customer will have to wait more than 20 days for an order, should the backorder inventory policy be adopted? Assume 250 working days per year. Solution to Problem D = 800 units/year C0 = $150 H = $10/unit/year Cb = $20/unit/year Planned shortage model:
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Q* =
2DS ( H + C B H CB
) =
2( 800 )( 150 ) ( 10 ) + 20 10 20
EOQ model:
Q* = 2DS = H 2(800)(150) = 154.92 units 10
Total cost planned shortage model: TC = Total annual inventory cost HC = Annual inventory holding cost SC = Annual setup cost BC = Annual backordering cost HC =
(Q B) 2 (189.737 63.24) 2 H= (10) = $421.68 2Q 2(189.737)
D 800 S = 189.737 (150) = $632.45 Q
SC =
SC =
TC = HC + SC = 774.60 + 774.60 =$1,549.20 TCDifference = 1,549.20 1,264.91 = $284.29 Using the planned shortage model will result in savings of $284.29. Number of orders =
D 800 = = 4.216 orders Q 189.737
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D Q
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