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Tutorial: INVENTORY MANAGEMENT

1. Best Book Shop divides inventory items into three classes, according to their value
usage. Calculate the usage values of the following inventory items and determine which
is most likely to be classified as an A item.

Part Number Quantity Used Per
Year
Unit Value (RM)
1 500 3
2 18000 0.02
3 10000 0.75
4 75 40
5 20000 0.05
6 3000 0.15
7 150000 0.45



2. ABC corporation has got a demand for particular part at 10 000 units per year. The cost
per unit is RM 2 and it costs RM 36 to place an order and to process the delivery. The
inventory carrying cost is estimated at 9 percent of unit costs. Determine

i) Economic order quantity
ii) Optimum number of orders to be placed per annum
iii) Minimum total cost of inventory per annum



3. DEF company produces a cable at the rate of 5000 meters per hour. The cable is used
at the rate of 2500 meters per hour. The cost of the cable is RM 5 per meter. The
inventory carrying cost is 25 percent and setup costs are RM 4050 per setup. Determine
the optimal number of cycles required in a year for the manufacture of this cable if the
company operate 8hr/day for 365 day.



4. A supplier for Northern Hospital has introduced quantity discount to encourage larger
order quantities of special equipments. The price schedule is

Order Quantity Price Per Unit
0 to 299 RM 60
300 to 499 RM 58
500 or more RM 56

The hospitals estimates that is annual demand for this item is 850 units, its ordering
costs is RM40 per order, and its annual holding costs is 20 percent of the equipments
unit price. What quantity of this equipment should the hospital order to minimize total
costs?






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5. Alias opened a gift shops three years ago. Managing inventories has become a problem.
One of the top selling items in the gift shop is mug. Sales are 18 units per week, and the
supplier charges RM60 per unit. The cost of placing an order with the supplier is RM 45.
Annual holding cost is 25 percent of a mug s price. The shop operates 52 weeks per
year. Management chose a 390-unit lot size so that new orders could placed less
frequently. What is the annual cost of the current policy of using a 390-unit lot size.
Would a lot size using EOQ be better?



6. Calculate the EOQ and its total annual cost in Example 5. How frequently will orders be
placed if the EOQ is used?



7. A plant manager of a chemical plant must determine the lot size for a particular chemical
that has a steady demand of 30 barrels per day. The production rate is 190 barrels per
day, annual demand is 10, 500 barrels, setup cost is RM 200, and annual holding cost is
RM 0.21 per barrel. The plant operates 350 days per year. Determine:
a. The economic production order quantity.
b. The total annual cost for this item.
c. The time between order



8. Universal tooling has a requirement for 150 000 metal bushings per annum. The
company orders the metal bushings in lots of 40 000 units from a supplier. The ordering
cost is RM 40 and the carrying charges are expressed 20 percent of the unit cost. The
bush costs RM 15 each. The company wants to know what percentage of their order
quantity differs from economic order quantity and how the cost varies for the two. Find
the optimal order quantity.



9. Annual requirement of an item is 2400 units. Each item costs the company RM 6. The
manufacturer offers discount of 5 percent if 500 or more quantities are purchased. The
ordering cost is RM 32 per order and inventory costs is 16 percent. Whether it is a
advisable to accept the discount? Comment.



10. WWW Assembly, has a demand for 12 000 watch per year. The firm operates a 250 day
working year. On average, delivery of an order takes 4 working days. Calculate the
Reorder point. Draw the reorder point curve for this case












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Answer:

Q1

Compute the annual usage value:

Part Number Annual Usage Value Rank
1 500 x 3 1500 4
2 18000 x 0.02 360 7
3 10000 x 0.75 7500 2
4 75 x 40 3000 3
5 20000 x 0.05 1000 5
6 3000 x 0.15 450 6
7 150000 x 0.45 67500 1

The annual usage value in descending order is written:

Part Number Annual Usage
Value
Cum Annual Cum Usage Value
%
% of item in class
7 67500 67500 83 1/7 x 100 = 14% A
3 7500 75000 92.2%
2/7 x 100 = 42.9% B
4 3000 78000 95.9%
1 1500 79500 97.8%
4/7 x 100 = 57.1% C
5 1000 80500 99%
6 450 80950 99.6%
2 360 81310 100%


Q2

D = 10 000 units
S = RM 36
H = 0.09 x 2 = RM 0.18


i) Q= 2000
ii) N=5
iii) TC = RM360


Q3

P= 5000 m/h
d= 2500 m/h
H= 0.25 x 5 = RM 1.25
S= RM 4050

N = 24 times




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Q4

D= 850 units
S= RM 40
H= 0.2 x Price per unit

The first step is to compute Q*, Order Quantity for every discount:

0-299
2 2(850)(40)
75.28 76 unit
0.2 60
DS
Q
H x


Q
300 -499
= 77 unit

Q
500
= 78 unit

The second step is to adjust upward those values of Q* that are below the allowable discount
range. Since
- Q*
0-299
= 76 is between 0-299, it need not to be adjusted.
Q*
0-299
= 76
Q*
300-499
= ?
Q*
500
= ?

After this step, the following order quantities must be tested in total cost equation:

The third step is to use the total cost equation and compute a total cost for each quantity.
Total Cost:

0-299
850 76
(40) (0.2 60) 60(850)
2 76 2
447.37 + 456 + 51000 =RM 51903.37
D Q
TC S H PD x
Q

TC
300 -499
= RM 51153.33
TC
500
= RM 50468


Q5

TC = RM 3033


Q6

TC = RM 1124.1
N = 13 orders






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Q
Inventory Level (units)
Q7

a. Q = 4874
b. TC = RM 861.86
c. N = 2 times

Q8

40000 6000
Quantity Differents 100% 85%
40000
x

Total Cost Differents = 60150 - 6000= RM 54150


Q9

TC
optimal
= RM 14784
TC
Q=500
= RM 14062

Annual total cost for Q=500 is less then Q= 400, TC
Q=500
< TC
Q=400,
Thus, the discount accepted and the order quantity should be 500 units.

Q10


D= 12 000 units
LT= 4 days

ROP = d x L

12000
48
250
d

ROP = 48 x 4 = 192 units


Reorder Point Curve






ROP = 192
L = 4
Time (days)