Case study of Supply Chain and Operation Management

Email: bagus.prabowo.a@mail.ugm.ac.id

This article discusses solution of Inventory and Aggregate Planning based on case in
the book of supply chain by S. Chopra and Operation Management by J Heizer

Case 1
Motorola obtains cell phones from its contract manufacturer located in China to supply the U.S.
market, which is served from a warehouse located in Memphis, Tennessee. Daily demand at
the Memphis warehouse is normally distributed, with a mean of 5,000 and a standard deviation
of 4,000. The warehouse aims for a Type I CSL of 99 percent. The company is debating whether
to use sea or air transportation from China.
Sea transportation results in a lead time of 36 days and costs $0.50 per phone. Air transportation
results in a lead time of 4 days and costs $1.50 per phone. Each phone costs $100, and Motorola
uses a holding cost of 20 percent. Assume that Motorola takes ownership of the inventory on
delivery.
Assume that Motorola follows a periodic review policy. Given lot sizes by sea and air, Motorola
would have to place order every 20 days using sea transport but could order daily using air
transport a. Assume that Motorola follows a periodic review policy. What Order up to level
(OUL) and safety inventory should the warehouse aim for when using sea or air transportation?
How many days of safety inventory will Motorola carry under each policy?
b. How many days of cycle inventory does Motorola carry under each policy?
c. Under a periodic review policy, do you recommend sea or air transportation?
Answer: Given

Sea Transport Air Transport

Average Daily Demand (D) 5.000
Minimum Lot Size Q 100.000 5.000
Standard deviation 𝜎𝐷 4000
Holding Cost 20% 0.2
CSL=99%=Z=Norm.inv 2.33

Order frequency every 20 days every day

Unit cost (C) $100
Order cost (S) $ 0.5 per phone $1.5 per phone
Lead time (L) 36 days 4 days
Safety Stock= Z. 𝝈𝑫 .√𝐋
ROP= Average daily demand x Lead time + Z. 𝝈𝑫 . √𝐋

Sea Transport Air Transport

Safety Stock =2.33 x 4000 x √36 Safety Stock =2.33 x 4000 x √4
= 55.920 unit = 18.640 unit

ROP = 5.000 x 36 + Safety stock ROP = 5.000 x 4 + Safety stock

= 180.000 + 55.920 = 20.000 + 18.640
= 235.920 unit = 38.640 unit

𝑄 100.000 𝑄 5.000
Cycle Inventory = 2
= 2
= Cycle Inventory = = = 2.500
2 2
50.000 unit/ 20 days = 2.500 unit /day unit/day

Total Inventory = 55.920 + 2.500 = 58.420 Total Inventory = 18.640 + 2.500 = 21.140
Total cost = 58.420 x $ 0.5= $ 29.210 Total cost = 21.140 x $ 1.5= $ 31.710

Motorola should use Sea transport because it will give less cost compare to Air
transport
Case 2
TopOil, a refiner in Indiana, serves three customers near Nashville, Tennessee, and maintains
consignment inventory (owned by TopOil) at each location. Currently, TopOil uses TL
transportation to deliver separately to each customer. Each truck costs $800 plus $250 per
stop. Thus delivering to each customer separately costs $1050 per truck. TopOil is
considering aggregating deliveries to Nashville on a single truck. Demand at the large
customer is 60 tons a year, demand at the medium customer is 24 tons per year, and demand
at small customer is 8 tons per year. Product cost for TopOil is $10,000 per ton, and it uses a
holding cost of 25 percent. Truck capacity is 12 tons.

a. What is the annual transportation and holding cost if TopOil ships a full truckload each
time customer is running out of stock? How many days of inventory is carried at each
customer under this policy?
b. What is the optimal delivery policy to each customer if TopOil aggregates shipments to each
of the three customers on every truck that goes to Nashville? What is the annual transportation
and holding cost? How many days of inventory are carried at each customer under this policy?
c.what is the optimal delivery price to each customer if TopOil aggregates each shipments to
each of the three customers on every truck that goes to nashville? what is the total annual
transportatioin and hlding cost? how many days of inventory are carried at each customer under
this policy?

Answer: given

Small Customer Medium Customer Large Customer

Demand (D) 8 tons/year 24 tons/year 60 ton/year
Order cost (S) $800+$250 $1050 $1050 $1050
Holding cost as a friction (h) 0.25 0.25 0.25
Cost per unit (C) $10.000/ton $10.000/ton $10.000/ton
Truck Capacity: 12 tons

Answer point B Small Customer Medium Customer Large Customer

2.𝐷.𝑆 2.(8).(1050) 2.(24).(1050) 2.(60).(1050)
EOQ (Q)= √ ℎ.𝐶 𝑄 = √0.25(10.000) =2.5 𝑄 = √ 0.25(10.000) =4.4 𝑄 = √ 0.25(10.000) =7

Cycle Inventory = 2.5 4.4 7

𝑄 = 1.25 = 2.2 = 3.5
2 2 2
2
8 𝑡𝑜𝑛/𝑦𝑒𝑎𝑟 24 𝑡𝑜𝑛/𝑦𝑒𝑎𝑟 60 𝑡𝑜𝑛/𝑦𝑒𝑎𝑟
Order frequency (n) =3 =5 =8
𝐷 2.5 𝑡𝑜𝑛 4.4 𝑡𝑜𝑛 7 𝑡𝑜𝑛
𝑄
Annual holding
1.25 (0.25).($10.000) 2.2 (0.25).($10.000) 3.5 (0.25).($10.000)
cost
𝑄 = $3125 = $5.500 = $8.750
(ℎ). (𝐶)
2
Annual order cost 3.($1050) = $3150 5.($1050) = $5250 8.($1050) = $8400
𝐷
(𝑆)
𝑄

Average flow time 2.5 4.4 7

=0.15/year =0.09/year =0.05/year
𝑄 2.(8) 2.(8) 2.(8)
=8/week =4/week =2/week
2𝐷
Annual Cost= 1.25(0.25)($10.000)+ $10850 $17250
Cyc.inv.(h)(C) + 3($1050) = $6275
order freq.(order
cost)

TC= $34375

Answer point C
S=$800, S1=S2=S3=$250

𝑆 ∗=S+S1+S2+S3 =𝑺∗ =$1550

Ʃ 𝑫𝒊(𝒉)(𝑪𝒊) 𝟖(𝟎.𝟐𝟓)(𝟏𝟎.𝟎𝟎𝟎)+𝟐𝟒(𝟎.𝟐𝟓)(𝟏𝟎.𝟎𝟎𝟎)+𝟔𝟎(𝟎.𝟐𝟓)(𝟏𝟎.𝟎𝟎𝟎)
n=√ 𝟐𝑆 ∗
=√ 𝟐𝑆 ∗
= 𝟖. 𝟔 times/year
Annual order cost = 8.6 x $1550 = $13330

Small Customer Medium Customer Large Customer

𝐷 8 24 60
Q= 𝑛 = 0.9 ton/order = 2.7 ton/order = 6.9 ton/order
8.6 8.6 8.6

𝑄 0.9 2.7 6.9

Cycle inv= 2 = 0.45 = 1.35 = 3.45
2 2 2
0.9
Avergflowtime = 0.05 = 3 weeks 0.9 6.9
𝑄
2(8) = 0.05 = 0.05
2(24) 2(60)
2𝐷
= 3 weeks = 3 weeks

Annual hold cost 0.45.(0.25)($10000)=

ℎ(𝐶)𝑄𝑖
2 $1125 $3375 $8625
Cycl.iv x hold cost

TC=$26455
 Quantity order = Qsmall+Qmed+Qlarge =0.9+2.7+6.9=10.5 tons/order
Quantity order<Truck capacity

Small Customer Medium Customer Large Customer

Order freq= D/Q 8 24 60

= 9 𝑡𝑖𝑚𝑒𝑠 = 9 𝑡𝑖𝑚𝑒𝑠 = 9 𝑡𝑖𝑚𝑒𝑠
0.9 2.7 6.9

Case 3

Prefab, a furniture manufacturer, uses 20,000 square feet of plywood per month. It's trucking
company charges Prefab $400 per shipment, independent of the quantity purchased. The
manufacturer offers an all unit quantity discount with a price of $1 per square foot for orders
under 20,000 square feet, $0.98 per square feet, and $0.96 per square foot for orders larger than
40,000 square feet. Prefab incurs a holding cost of 20%. What is the optimal lot size for Prefab?

Answer = given

Order quantity Price $

< 20000 1
20000-40000 0.98
>40000 0.96

𝑞0 = 00000 𝐶0 = $1
𝑞1 = 20000 𝐶1 = $0.98
𝑞1 = 40000 𝐶2 = $0.96
Demand= 20000x12=240000/year
h= 0.2 S= $400

Step 1
Define EOQ in the lowest cost

2.𝐷.𝑆 2.(240000).(400)
EOQ (𝑄2 )= √ ℎ.𝐶 =√ = 31622
2 0.2.(0.96)
Check= 31622<40001 (not feasible)
Define T𝐂𝟐 !
𝐷 𝑞2 240000 40001
(𝑆)+ . (ℎ). (𝐶2 ) + 𝐷. (𝐶2 ) = ($400) + . (0.2). ($0.96) + 240000. ($0.96)
𝑞2 2 40001 2
= $236.640
 2.𝐷.𝑆 2.(240000).(400)
EOQ (𝑄1 )= √ ℎ.𝐶 =√ = 31298
2 0.2.(0.98)
Check= 20000<31298<40000 (feasible)
Define T𝐂𝟏 !
𝐷 𝑞 240000 31298
(𝑆)+ 1 . (ℎ). (𝐶1 ) + 𝐷. (𝐶1 ) = ($400) + . (0.2). ($0.98) + 240000. ($0.98)
𝑞1 2 31298 2
= $241.334

T𝐂𝟐 < T𝐂𝟏 so optimal lot size, when order larger than 40000 square feet

Aggregate case
Missouri's Soda Pop Inc. has a new fruit drink for which it has high hopes. Steve Allen, the
production planner, has assembled the following data and demand forecast. He has to create
an aggregate plan. His three options are:
A) Chase Strategy that hires and fires personnel as necessary to meet the forecast
B) level strategy
C) a level strategy that produces 1200 cases per quarter and meets the forecast demand with
inventory and subcontracting

1)Which strategy provides the lowest cost?

2)If you are Steve's boss, which plan do you implement and why?

Quarter Forecast
1 1800
2 1100
3 1600
4 900

Costs
Pervious quarters inventory: 1300 cases
Beginning Inventory: 0 cases
Stockout Costs: $150 per case
Inventory Holding Costs: $40 per case at end of quarter
Hiring Employees: $40 per case
Firing Employees: $80 per case
Subcontracting Cost: $60 per case
Unit Cost on Regular Time: $30 per case
Overtime Cost: $15 extra per case
Capacity on Regular Time: 1800 cases per quarter
Answer=
Q Forecast Inventory Production Hiring Layoff Prod Hiring Layoff
Cost cost cost
A B C
($30) ($40) ($80)
0 - 1300 1300 500 - - 20000
1 1800 - 1800 - 700 54000 56000
2 1100 - 1100 500 - 33000 20000
3 1600 - 1600 - 700 48000 56000
4 900 - 900 - - 27000
Total cost = $314000 (plan A) 162000 40000 112000

Q Forecast Production Inventory Hiring overtime Prod Hiring Inv OverT

Cost cost cost Cost
A B C=B-A
($30) ($40) ($40) ($15)
0 1300 50 20000
1 1800 1350 450 40500 6750
2 1100 1350 250 40500 10000
3 1600 1350 40500
4 900 1350 450 40500 18000
5400 162000 20000 28000 6750
Ʃ 𝒇𝒐𝒓𝒆𝒄𝒂𝒔𝒕 𝟓𝟒𝟎𝟎 Total Cost= 198750 (plan B)
Level strategy= Ʃ𝑸
= 𝟒 = 𝟏𝟑𝟓𝟎
 Q Forecast Production Inventory subcont layoff Prod Inv Subcont layoff
Cost cost cost Cost
A B C=B-A
($30) ($40) ($60) ($80)
0 1300 100 8000
1 1800 1200 600 3600 36000
2 1100 1200 100 3600 4000
3 1600 1200 400 3600 24000
4 900 1200 300 3600 12000
Total Cost = $ 228000 144000 16000 60000 8000

Plan B has the lowest cost at $198750.

If I were the boss I would take plan B (level strategy)

Case Transport method

Lon Min has developed a specialized airtight vacuum bag to extend the freshness of seafood
shipped to restaurants. He has put to gether the following demand cost data:

Q Forecast (unit) Regular time Over time Sub contract

1 500 400 80 100
2 750 400 80 100
3 900 800 160 100
4 450 400 80 100

Initial inventory = 250 units

Regular time cost = $1.00/unit
Overtime cost = $1.50/unit
Subcon tracting cost = $2.00/unit
Carrying cost = $0.50/unit/quarter
Back -order cost = $0.50/unit/quarter
Min decides that the initial inventory of 250 units will incur the 20c/unit
cost from each prior quarter (unlike the situation in most companies,
where a 0 unit cost is assigned).

a) Find the optimal plan using the transportation method.

b) What is the cost of the plan?
c) Does any regular time capacity go unused? If so, how much in
which periods?
Answer
1 2 3 4 dummy capacity
Q 250 0 1 1.5 2

1 Reguler 250 1 150 .

1.5 400
overtime . 80 2 80
subcontract 100 100
2 Reguler 400 1 400
overtime 80 .
1.5 80
subcontract 40 2 60 100
3 Reguler 800 1 800
overtime 100 .
1.5 60 160
subcontract 100 100
4 Reguler 400 1 400
.
overtime 50 1.5 30 80
subcontract 100 100
forecast 500 750 900 450 450 3050

b) Total cost
250(0)+250(1)+150(1.5)+80(2)+400(1)+80(1.5)+40(2)+800(1)+100(1.5)+400(1)+50(1.5)
= $2660
c) all regular time were used, so the answer No it does not