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Quiz II SCM Ans

1. The annual inventory cost at NS is $20,000 and at GH is $35,000. If NS changes its lot size to 20,000 and GH offers a lower price, the total annual savings is $1,120. 2. For BVE store, the EOQ is 1265 laptops. The optimal CSL is 96.8%. With a target CSL of 97.8%, the safety inventory is 1200 laptops. 3. Using a single distribution center, the required safety inventory is 13,120 units. Outsourcing to TPS reduces the safety inventory to 9722 units, saving $169,900 annually and making the outsourcing strategy sensible.

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567 views3 pages

Quiz II SCM Ans

1. The annual inventory cost at NS is $20,000 and at GH is $35,000. If NS changes its lot size to 20,000 and GH offers a lower price, the total annual savings is $1,120. 2. For BVE store, the EOQ is 1265 laptops. The optimal CSL is 96.8%. With a target CSL of 97.8%, the safety inventory is 1200 laptops. 3. Using a single distribution center, the required safety inventory is 13,120 units. Outsourcing to TPS reduces the safety inventory to 9722 units, saving $169,900 annually and making the outsourcing strategy sensible.

Uploaded by

Costina Luc
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© © All Rights Reserved
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Name:

MECH 6076 (Supply Chain Modeling and Optimization) Quiz II


1. Annual demand of vitamins is 100,000 bottles at the Nutrition Store (NS). Currently NS
purchases vitamins from General Health (GH) for $10 (capital cost) a bottle with a lot size of
10,000. The fixed ordering cost is $1,000. The inventory holding cost is 20% of the capital
cost. GH’s production cost is $5 per bottle of vitamins. The inventory holding cost is $1 per
bottle per year. GH incurs an order filling cost of $3,000 each time it ships vitamins to NS.
a. What is the annual inventory cost (holding + ordering) at NS?
b. What is the annual inventory cost (holding + order filling) at GH?
c. If GH offers a price of $9.94 for order quantity of 20,000 and above and NS changes its
lot size to 20,000, what is the savings in total annual inventory cost at the two companies?

Number of orders each year n = 100,000/10,000 = 10


a. At NS, holding cost + ordering cost = (Q/2)H + nO = (10,000/2)×10×20% + 10×1,000 =
$20,000
b. At GH, holding cost + order filling cost = (Q/2)H + nO =(10,000/2)×1 + 10×3,000 = $35,000
c. When NS orders with a lot size of 20,000 bottles, the number of orders each year will be
reduced to 5. GH also only needs to fill orders 5 times a year.
At NS, holding cost + ordering cost = (20,000/2)×9.94×20% + 5×1,000 = $24,880
The saving in purchase cost is (10 − 9.94)×100,000 = $6,000
The overall saving is 6,000 + (20,000 − 24,880) = $1,120
At GH, holding cost + order filling cost = (20,000/2)×1 + 5×3,000=$25,000
The loss in revenue is (10 − 9.94) ×100,000 = $6,000
The overall saving is (35,000 – 25,000) − 6,000 = $4,000
Both companies improve profitability.

2. Weekly demand of laptop computers in BVE store is independent and normally distributed
with a mean of 1,000 and a standard deviation of 300. There are 52 weeks in a year. The
inventory holding cost is $130 per laptop per year. The fixed ordering cost is $2,000. The
replenishment lead time is 4 weeks. If laptops are out of stock, the store offers $100 discount
per laptop to keep the customer.
a. What is the economic order quantity (EOQ)?
b. What is the optimal cycle service level (CSL)?
c. BVE aim to achieve a CSL of 97.8% [F-1(.978, 0, 1) = 2]. What is BVE’s safety inventory?

Yearly demand D = 52×1000 = 52000


Inventory holding cost H = $130 /laptop/year
Fixed ordering cost O = $2000
Lead time L = 4 weeks
Standard deviation during lead time  L   L  300  4  600
2 DO 2  52000  2000
a. EOQ =   1265
H 130
b. CSL* = 1 – QH/DCd = 1 – 1265×130/(52000×100) = 96.8%
c. ss = F-1(CSL)×L = 2×600 = 1200
Name:
3. Epson produces printers for sale in Europe in its Taiwan factory. Printer sold in different
countries differs in terms of the power outlet as well as language manuals. Currently Epson
assembles and packs printers for sale in individual countries. The distribution of weekly
demand in different countries is normally distributed with mean and standard deviation as
shown in the following table
Country Demand Country Demand
Mean Standard Deviation Mean Standard Deviation
France 3000 2000 Italy 2500 1000
Germany 4000 2000 Portugal 1000 1000
Spain 2000 1000 UK 4000 2000
Demark 1000 1000
The lead time from the Taiwan factory is four weeks. The shipping cost is $200,000 per year.
The inventory carrying cost is $50 per printer per year.
a. How much safety inventory does Epson require in Europe if it targets a cycle service
level of 95% [F-1 (0.95,0,1) =1.64]?
b. Epson plans to use a single distribution center in Europe to supply all 7 countries
(assume demand in each country is independent). It is considering outsourcing the
shipping to TPS. TPS can reduce the shipping lead time to a mean of one week and a
standard deviation of 0.25 week, with a yearly cost of $300,000. Does this outsourcing
strategy make sense?

a. Currently inventory is not aggregated; total safety inventory is the sum of safety inventory
for all 7 countries:
ss  iF 1 (CSL)   i  L  1.64  4  i i  3.28 10,000  32,800
b. If a single distribution center is used, inventory will be aggregated; aggregated demand
mean is   ii  (3  4  2  1  2.5  1  4) 1000  17500 and standard deviation is
   i i2  3  20002  4 10002  4000 .
Without using TPS, the replenishment lead time remains at 4 weeks. The required safety
inventory is ss  iF 1 (CSL)     L  1.64  4  i i  3.28  4000  13,120
When using TPS, the standard deviation of demand during lead time is
 L  L 2  2 E2  1 40002  175002  0.252  5928
ss  F 1 (CSL)   L  1.64  5928  9722 ;
The saving in holding safety inventory is (13,120 – 9722)×50 = $169,900, which is lower
than the extra cost ($100,000) TPS charges; therefore the strategy makes sense.
Name:

4. Champion makes winter fleece jackets for sale in the United States. Each jacket sells for $60
and costs $30 to produce. Any leftover jackets at the end of the season are shipped to South
America and sold for $40 per jacket. Holding a jacket until the end of the season costs $5.
Shipping to South America costs $5 per jacket.
a. What is the understocking cost?
b. What is the overstocking cost?
c. What is the optimal cycle service level (CSL)?
d. If the demand in the United States is estimated to be between 200,000 to 400,000
(uniform distribution), how many jackets should Champion make?

retail price p = $60


cost c = $30
salvage value s = $40
holding cost h = $5
shipping cost t = $5
a. Cu = p – c = 60 – 30 = $30
b. Co = s – c – h – t = 40 – 30 – 5 – 5 = $0
c. CSL* = Cu/(Cu + Co) = 30/(30 + 0) = 1
d. CSL* = 1 means satisfying customer demand 100% of the time. The maximum customer
demand is 400,000 so champion should make 400,000 jackets.

5. Weekly demand of books at Books-On-Line is independent and normally distributed with a


mean of 50,000 and a standard deviation of 25,000. The yearly inventory holding cost is $2
per book per year. Books- On-Line replenishes inventory every 3 weeks and aims for a
97.7% cycle service level [F-1 (0.977,0,1) =2]. The replenishment lead time is 1 week. Books-
On-Line’s warehouse is designed to carry 33 percent more than the replenishment order (Q)
plus safety stock (ss), i.e, 1.33Q + ss. The fixed cost of a warehouse per year is $20,000 + x,
where x is its capacity in books. The weekly operating cost of the warehouse is $0.01y, where
y is the number of books shipped.
a. What is the average replenishment order quantity?
b. What is the safety stock level?
c. What is the yearly cost of the warehouse?
d. What is the yearly inventory holding cost?

a. Replenish every 3 weeks, average order quantity Q = 50,000×3=150,000


b. Ordering every 3 weeks implies a periodic review policy with a 3-week interval,
therefore, ss  F 1 (CSL)    T  L  2  25000  4  100,000
c. Fixed warehouse cost = 20,000 + 1.33×150,000 + 100,000 = $319,500; warehouse
operating cost = 0.01×50,000×50 = $25,000; warehouse cost = $319,500 + $25,000 =
$344,500
Q   150000 
d. Inventory holding cost =   ss   H    100000   2  $350,000
2   2 

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