School of Industrial Engineering & Management (IEM) Inventory Management
International University, VNU-HCM Instructor: Dr. Nguyen Van Hop
Homework 2_Chapter 2 (continued)
Deadline: Class Day next week
I. Problem statement:
1. Quantity discount model:
- Assumption: Demand is constant, suppliers give quantity discount policy.
- Decision variable: Optimal order quantity Q given demand rate, associated cost
(ordering, holding, unit cost,..), discount policy
- Method: Cost minimization (exact analysis)
2. Backorder model:
- Assumption: When demand is unsatisfied, customers place order and wait
(backordering), EOQ assumptions are in place
- Decision variable: Optimal ordering size Q* and optimal backorder level S* given as
EOQ model adding shortage cost per unit per year c s and shortage administration cost
per unit c b
- Method: Cost minimization (exact analysis)
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II. Homework:
Problem 1: Input data of AAC in excel for the case of discount
Valu
Definition Parameter e Unit
Ordering cost (20 minutes to check labor cost
$12/hour) C0 12 $/order
Production cost/ Price C 10 $/item
Holding cost rate (10% of annual interest+ 4%
miscellaneous) H 14% $/$/year
Holding cost Ch 1.4 $/unit/year
Average demand D 6240 items/year
Assume that the supplier offers for orders having the quantity from the levels of 500
units, the discount price will be to the levels of 0.5 USD. Observe the results and explain
Lowest cost order size per discount level
Discount Qualifying Price
level order per unit Q*
0 1 - 499 10 327
1 500 - 999 9.5 336
2 1000 - 1499 9 345
3 1500 - 1999 8.5 355
4 2000 - 2499 8 366
5 2500 - 2999 7.5 378
6 3000 - 3499 7 391
8 3500 - 3999 6.5 406
9 4000 - 4499 6 422
10 4500 - 4999 5.5 441
11 5000 - 5499 5 463
12 5500 - 5999 4.5 488
13 6000 - 6240 4 517
In the table above, we find the optimal order Qi* for each discount level “I” by using
formular:
Discount
Price
per unit Qi* Total Cost
10 327 $62,857.89
9.5 500 $59,762.26
9 1000 $56,864.88
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8.5 1500 $53,982.42
8 2000 $51,077.44
7.5 2500 $48,142.45
7 3000 $45,174.96
6.5 3500 $42,173.89
6 4000 $39,138.72
5.5 4500 $36,069.14
5 5000 $32,964.98
4.5 5500 $29,826.11
4 6000 $26,652.48
In the second table, for each discount level “i”, we modify Qi* as follows:
- If Q* < qi then Qi* = qi
- If qi < or = Q* < q(i+1) then Qi* = Q*
- If q(i+1) < or = Q*, we eliminate it.
After that, we substitute the modified Q* value in the total cost formula TC(Qi*):
In this case, we do not have Safety stock, so we ignore it.
Lastly, we select the Qi* that minimizes TC(Qi*). Hence the AAC should order 6000 items
as its results in the minimum total annual cost ($26,652.48)
Problem 2: Input data of SCANLON in excel and change the lead time to be longer,
observe the results and explain
Problem3: A manufacturing firm located in Calgary produces an item in a 3-month time
supply. An analyst, attempting to introduce a more logical approach to selecting run
quantities, has obtained the following estimates of the characteristics of the item: Demand
rate at 4,000 units/year (assumed constant), fixed ordering cost is $5, unit variable cost is $4
per 100 units, carrying rate is at 0.25 $/$/year
Note: Assume that the production rate is much larger than D.
a/ What is the optimal order quantity ?
b/ What is the time between consecutive replenishments of the item when the EOQ is used?
c/ The production manager insists that the fixed ordering cost A ($5) figure is only a guess.
Therefore, he insists on using his simple 3-month supply rule. Indicate how you would find
the range of A values for which the optimal order quantity EOQ (based on A = $5) would be
preferable (in terms of a lower total of replenishment and carrying costs) to the 3-month
supply?
Problem 4: The famous Ernie of “Sesame Street” continually faces replenishment decisions
concerning his cookies supply. The Cookie Monster devours the cookies at an average rate of
200 per day. The cookies cost $0.03 each. Ernie is getting fed up with having to go to the
store once a week. His friend, Bert, has offered to do a study to help Ernie with his problem.
a/ If Ernie is implicitly following an EOQ policy, what can Bert say about the implicit values
of the two missing parameters?
b/ Suppose that the store offered a special of 10,000 cookies for $200. Should Ernie take
advantage of the offer? Discuss.
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Problem 5: A supplier offers the following discount structure on purchases of any single item:
0<Q<1000 $5.00 per unit
1000 ≤Q<2000 $4.90 per unit
2000 ≤Q $4.75 per unit
The discounts apply to all units. For each of the following items treated separately, what is
the appropriate order quantity to use, assuming a common value of r =0.30$/$/yr?
Ite Demand D (units/ Ordering cost A
m year) ($)
1 10,000 25
2 1,000 25
3 4,000 25
4 130,000 25
Problem 6: Suppose that the demand for a product is 30 units per month and the items are
withdrawn at a constant rate. Each item carries a variable cost of $3 per item. The ordering
cost each time a purchasing order trigger is $20, and the inventory holding cost is $0.30
$/$/month. If shortages are allowed but cost $2 per item per month, and $1 for backorder
administration. The supplier takes 2 weeks for the product to be at the customer door.
Determine how often to make an order and what size it should be?
