Chapter II

Inventory control system

Exercise 1: A company manufactures a line of ten items. The usage and unit cost are
shown in the following table along with the annual birr usage.
a. Calculate the annual birr usage for each item.
b. List the items according to their annual birr usage.
c. Calculate the cumulative annual birr usage and the cumulative percentage of items.
d. Group items into an A, B, C classification.
2.An oil engine manufacturer purchases lubricants at the price of birr.
42 per piece from a vendor. The requirements of these lubricants are
1800 per year. What should be the ordering quantity per order, if the
cost per placement of an order is birr. 16 and inventory carrying charges
per price per is 0.20 birr.

3. A manufacturing company purchase 9000 parts of a machine for its

annual requirements ordering for month usage at a time, each part costs
birr 20. The ordering cost per order is birr. 15 and carrying charges are
15% of the cost of the part. You have been assigned to suggest a more
economical purchase policy for the company. What advice you offer
and how much would it save the company per year?
3.An auto parts supplier sells brand batteries to car dealers and auto
mechanics. The annual demand is 1,200 batteries. The supplier pays
$28 for each battery and estimates that the annual holding cost is 30% of
the battery’s value. It costs $20 to place an order (managerial and
clerical costs). The supplier currently orders 100 batteries per month.
a. Determine total inventory costs for the current order quantity.
b. Determine the economic order quantity (EOQ).
c. How many orders will be placed per year using the EOQ?
d. Determine the total inventory costs for the new EOQ. How much
Total inventory cost saved?
4. Our college football team is playing in a tournament game this
weekend. Based on our past experience we sell on average 2,400 shirts
with a standard deviation of 350. We make $10 on every shirt we sell at
the game, but lose $5 on every shirt not sold. How many shirts should
we make for the game?
5. Average daily demand for a product is 20 units. The review period
is 30 days, and lead time is 10 days. Management has set a policy of
satisfying 96 percent of demand from items in stock. At the beginning
of the review period there are 200 units in inventory. The daily
demand standard deviation is 4 units.

6. Sport store is considering going to a different hat supplier. The

present supplier charges $10 each and requires minimum quantities of
490 hats. The annual demand is 12,000 hats, the ordering cost is $20,
and the inventory carrying cost is 20% of the hat cost, a new supplier is
offering hats at $9 in lots of 4000. Who should he buy from?
7.A cement manufacturing company has been using production runs
of 100,000 packets, 10 times per year to meet the demand of
1,000,000 packets annually. The set-up cost is birr 5000 per run and
the carrying cost is estimated at 10 per cent of the manufacturing cost
of birr 100 per packet. The production capacity of the machine is
500,000 packets per month. The factory is open 365 days per year.
Calculate the optimal production lot size; the number of production
runs per year; the total annual variable cost; and the difference
between existing total annual variable cost and optimal annual
variable costs; the order time between production runs; the maximum
inventory; and machine utilization.
8. A car retailer has a monthly demand of 12 cars. Each car costs birr
8,50,000. There is also a birr 10,000 order cost (independent of the
number of cars ordered). The retailer has an annual carrying cost at the
rate of 5 per cent on each car. It takes two weeks to obtain cars after
they are ordered. For each week, if one car is out of the market, the
retailer loses birr 4000 profit. (a) Find the EOQ and the optimal order
policy. (b) How many days after receiving an order does the retailer
run with inventory? (c) How long is the retailer without any inventory
per cycle?
9. An electronic shop carries film for the camera. The film costs the
shop birr 80 per unit and is sold for birr 85. The shop has the film shelf
life of 18 months. The shop sales are 21 films per week, and its annual
inventory carrying cost rate is 20 per cent. It costs the shop birr 20 to
place an order. The film manufacturing company offers a 7 per cent
discount on orders of 400 films or more, a 10 per cent discount for 900
films or more and a 15 per cent discount for 2000 films or more.
Determine the shop’s optimal quantity.
11. A furniture house wants a reorder point with a 95 per cent service
level and a 5 per cent stock-out probability. The average demand per
day is 75 chairs with a lead time of 5 days. The standard deviation is
6 chairs per day. Find the reorder point.
12. A cloth merchant has a fixed demand of 45 jackets per day. The
average lead time is 8 days and the deviation in lead time is 2 days.
Calculate the reorder point with 95 per cent service level.
13. A cloth merchant has an average demand of 45 jackets per day with
a standard deviation of 6 jackets per day. The average lead time is 8
days and the deviation in lead time is 2 days. Calculate the reorder
point with 95 per cent service level.
14. small shop has an average demand of 45 jackets per day and the
standard deviation in average demand is 6 jackets. The fixed time
between orders is 16 days and the lead time is 8 days. Inventory in
stock is 40 jackets. For 95 per cent of service level what should be the
order quantity?
 Exercise
1.R & B beverage company has a soft drink product that has a constant
annual demand rate of 3600 cases. A case of the soft drink costs R & B
$3. Ordering costs are $20 per order and holding costs are 25% of the
value of the inventory. R & B has 250 working days per year, and the
lead time is 5 days. Identify the following aspects of the inventory
policy:
a. Economic order quantity
b.Re-order point
c. cycle time
d. total annual cost
2.A computer company has annual demand of 10,000. They want to
determine EOQ for circuit boards which have an annual holding cost (H)
of $6 per unit, and an ordering cost (S) of $75. They want to calculate
TC and the reorder point (R) if the purchasing lead time is 5 days.
3.A retail outlet sells a seasonal product for $10 per unit. The cost of the
product is $8 per unit. All units not sold during the regular season are sold
for half the retail price in an end-of-season clearance sale. Assume that
the demand for the product is normally distributed with  = 500 and  =
100.
a. What is the recommended order quantity?
b. What is the probability of a stockout?
c. To keep customers happy and returning to the store later, the owner
feels that stockouts should be avoided if at all possible. What is your
recommended quantity if the owner is willing to tolerate a 0.15
probability of stockout?
d. Using your answer to part c, what is the goodwill cost you are
assigning to a stockout?
4.Assume that the ePaint Store has its own manufacturing facility in which it produces
Iron coat paint. The ordering cost, Co, is the cost of setting up the production process to
make paint. Co = $150. Recall that Cc =$0.75 per gallon and D =10,000 gallons per
year. The manufacturing facility operates the same days the store is open (i.e., 311 days)
and produces 150 gallons of paint per day. Determine the optimal order size, total
inventory cost, the length of time to receive an order, the number of orders per year, and
the maximum inventory level. The lead time to receive an order is 10 days, determine
the reorder point for paint.

5.ABC, a distributor of audio and video equipment, wants to reduce a large stock of
televisions. It has offered a local chain of stores a quantity discount pricing schedule, as
follows:
Quantity Price
1–49 $1400
50–89 1100
90 + 900
The annual carrying cost for the stores for a TV is $190, the ordering cost is $2,500, and
annual demand for this particular model TV is estimated to be 200 units. The chain
wants to determine if it should take advantage of this discount or order the basic EOQ
order size
6.For the ePaint Internet Store in Example 5, we will assume that daily demand for Iron
coat paint is normally distributed with an average daily demand of 30 gallons and a
standard deviation of 5 gallons of paint per day. The lead time for receiving a new order
of paint is 10 days. Determine the reorder point and safety stock if the store wants a
service level of 95%—that is, the probability of a stockout is 5%.

7. The KVS Pharmacy stocks a popular brand of over-the-counter flu and cold
medicine. The average demand for the medicine is 6 packages per day, with a standard
deviation of 1.2 packages. A vendor for the pharmaceutical company checks KVS’s
stock every 60 days. During one visit the store had 8 packages in stock. The lead time
to receive an order is 5 days. Determine the order size for this order period that will
enable KVS to maintain a 95% service level.

8. Average daily demand for a product is 20 units. The review period is 30 days, and
lead time is 10 days. Management has set a policy of satisfying 96 percent of demand
from items in stock. At the beginning of the review period there are 200 units in
inventory. The daily demand standard deviation is 4 units. how many units should be
ordered?
9. If 20 orders are placed in a year and management can tolerate 1
stockout in a year, acceptable level of stockout = 1/20 = 0.05 = 5% and
the service level = 1- 0.05 = 0.95