Inventory Tutorial Question 1

A carpet manufacturer has to supply 10000 meters/year of Ja-Namaz Design carpet to a carpet show room. The company has the capability to produce 150 meters of carpet per day. The cost of setup of the loom is $150 per run while the holding cost is $0.75/meter/yr. a) What is the optimum quantity the manufacturer should produce in a single run? b) How many days will each production run last. c) Number of production runs to meet Ja-Namaz Design requirement d) What is the maximum inventory Level

Demand D: 10000 m/yr Daily demand, d: 10000/365 m/day =27.4 m/day Production capacity, p = 150 m/d Set-up Cost, S: $150/run Holding Cost, H: $0.75.m/yr
A)What is the optimum quantity the manufacturer should produce in a single run?

a) Optimum Quantity Qopt =

= ((2* 10000*150)/ (0.75*(1-(27.4/150))) Optimum Quantity Qopt =2213 meters (answer a)

B) How many days will each production run last. Optimum quantity for each production run = 2710 m Production rate = 150 m/day Duration of each run = 2213/150 days = 14.75 days = 15 days (answer b) C) Number of production runs to meet Ja-Namaz Design requirement

Total Quantity: 10000 m Quantity in each run: 2710 No of runs= D/Q = 10000/2213 =4.52 runs
D) What is the maximum inventory Level

= 5 runs (answer c)

Max Inventory= Q (1 d/p) = 2213* (1-(27.4/150)) = 1808 m (answer d)

Question 2:
On average, I sell 150,000 units a year, which I obtain from a wholesaler. I estimate that the cost to me of placing an order is $50 with the average inventory storage cost being 20% per year of the cost of a unit ($5). a) What would be the optimal order quantity? b) I currently order 5 times a year. How much would I save by switching to the optimal order quantity as compared with my current policy of ordering 5 times a year?

Solution: Demand D =150000 units/yr Ordering Cost, S = $50/order i = 20% Purchase Price C= $5 Holding Cost iC = 0.2 * $5 = $1 A)What would be the optimal order quantity? Qopt= (2DS/H) = (2*150000*50)/1 Qopt= 3873 units (answer a) = 3873 units

B) I currently order 5 times a year. How much would I save by switching to the optimal order quantity as compared with my current policy of ordering 5 times a year? Current order quantity = 150000/5 = 30000 units Optimum Order Quantity = 3873 units Total Cost = DC + (Q/2)*H + (D/Q)*S Current Total Cost = (150000*5) + (30000/2)*1 + (150000/30000)*50 = 750000 + 15000+ 250 = $765250 New Total Cost with optimal order quantity TCnew = DC + (Qopt/2)*H + (D/Qopt)*S = (150000*5) + (3873/2)*1 + (150000/3873)*50 = 750000 + 1936.5+ 1936.5 = $ 753873 Net Saving under new order placement = $765250 - $ 753873 = $11377 (answer b)

Question 3:
A newsagent buys a weekly magazine for $4 each. He sells these magazines for $10 each during the week of publication. Any magazine not sold during the week is sold at a reduced price of $2 each during the following week. The probability of demand is as follows Demand
Probability Cum Prob

2
0.018 0.018

3
0.05 0.06 8

4
0.083 .151

5
0.111 .262

6
0.16 .422

7
0.167 .589

8
0.16 .749

9
0.111 .86

10
0.083

11
0.05

12
0.018

Calculate the number of magazines the newsagent should order each week.

Cost of underestimating the number of magazines Cu = $10 - $4 = $6 Cost of overestimating the number of magazines, Co = $4 - $2 = $2 P Cu / (Cu + Co) P 6/ (6+2) P 0.75 As seen from cumulative probability calculated above this cumulative probability is at magazine demand = 8 Newsagent should order 8 magazines (Answer)

Question 4:
A carpet store has a daily demand of 30 yards of carpet with a standard deviation of 5 yards per day. The lead-time for the order is 9 days. The carpet store wants a reorder point with a 95% service level and a 5% stock-out probability. Calculate the Reorder point and the Safety stock.

Daily demand d: 30 yds/day Standard deviation = 5 yds/day Lead Time L = 9 days Service Level = 95 % 0r 0.95 Z from Standard normal probability table : 1.645 Reorder Point = d*L + Z * * L Reorder Point = 30*9 +1.645* 5* 9 = 270+ 24.675 = 295 yards (Answer) Safety Stock = Z * * L Safety Stock = 1.645* 5* 9 = 25 yards (Answer)