Q. 1.
Thomas Kratzer is the purchasing manager for the headquarters of a large
insurance company chain with a central inventory operation. Thomas’s fastest-moving
inventory item has a demand of 6,000 units per year. The cost of each unit is $100, and
the inventory carrying cost is $10 per unit per year. The average ordering cost is $30
per order. It takes about 5 days for an order to arrive, and the demand for 1 week is 120
units. (This is a corporate operation, and there are 250 working days per year.)
a) What is the EOQ?
b) What is the average inventory if the EOQ is used?
c) What is the optimal number of orders per year?
d) What is the optimal number of days in between any two orders?
e) What is the annual cost of ordering and holding inventory?
f ) What is the total annual inventory cost, including the cost of the 6,000 units?
Q. 2. Emery Pharmaceutical uses an unstable chemical compound that must be kept
in an environment where both temperature and humidity can be controlled. Emery uses
800 pounds per month of the chemical, estimates the holding cost to be 50% of the
purchase price (because of spoilage), and estimates order costs to be $50 per order. The
cost schedules of two suppliers are as follows:
VENDOR 1 VENDOR 2
QUANTITY PRICE/LB QUANTITY PRICE/LB
1-499 $ 17.00 1-399 $ 17.10
500-999 16.75 400-799 16.85
1000 + 16.50 800-1199 16.60
1200 + 16.25
a) What is the economic order quantity for each supplier?
b) What quantity should be ordered, and which supplier should be used?
c) What is the total cost for the most economic order size?
Q. 3. Emarpy Appliance is a company that produces all kinds of major appliances.
Bud Banis, the president of Emarpy, is concerned about the production policy for the
company’s bestselling refrigerator. The annual demand has been about 8,000 units each
year, and this demand has been constant throughout the year. The production capacity
is 200 units per day. Each time production starts, it costs the company $120 to move
materials into place, reset the assembly line, and clean the equipment. The holding cost
of a refrigerator is $50 per year. The current production plan calls for 400 refrigerators
to be produced in each production run. Assume there are 250 working days per year.
a) What is the daily demand of this product?
b) If the company were to continue to produce 400 units each time production starts,
how many days would production continue?
c) Under the current policy, how many production runs per year would be required?
What would the annual setup cost be?
d) If the current policy continues, how many refrigerators would be in inventory when
production stops? What would the average inventory level be?
Q.4. Authentic Thai rattan chairs are delivered to Gary Schwartz’s chain of retail
stores, called The Kathmandu Shop, once a year. The reorder point, without safety
stock, is 200 chairs. Carrying cost is $30 per unit per year, and the cost of a stock out
is $70 per chair per year. Given the following demand probabilities during the lead
time, how much safety stock should be carried?
DEMAND DURING LEAD TIME PROBABILITY
0 0.2
100 0.2
200 0.2
300 0.2
400 0.2
Q. 5. Chicago’s Hard Rock Hotel distributes a mean of 1,000 bath towels per day to
guests at the pool and in their rooms. This demand is normally distributed with a
standard deviation of 100 towels per day, based on occupancy. The laundry firm that
has the linens contract requires a 2-day lead time. The hotel expects a 98% service level
to satisfy high guest expectations.
a) What is the safety stock?
b) What is the ROP?
Q. 6. Gainesville Cigar stocks Cuban cigars that have variable lead times because of
the difficulty in importing the product: lead time is normally distributed with an average
of 6 weeks and a standard deviation of 2 weeks. Demand is also a variable and normally
distributed with a mean of 200 cigars per week and a standard deviation of 25 cigars.
a) For a 90% service level, what is the ROP?
b) What is the ROP for a 95% service level?
