T.T.

Narendran
Department of Management Studies Indian Institute of Technology Madras

TTN-DoMS, IIT-MADRAS

Problem 1
Let Q* be the optimal order quantity in the sample EOQ model (constant rate of demand, instantaneous supply, no shortages) Let the actual order quantity Q be given by Q=K.Q*, K>0 a) Derive an expression for the ratio of the actual total cost/unit time to the optimal cost. b) If the holding cost/unit/unit time is overestimated by 20 percent, what is the percentage increase in the total cost over the optimal cost?
TTN-DoMS, IIT-MADRAS

a) Q*=(2DC0/CC) Q = k.Q* TC = DC0/kQ*+kQ*CC/2 TC = DC0CC / k(2DCo) + k(2DCo) CC/2 CC = (DC0CC)/(2).k + k (DC0CC)/2

TC = (DC0CC/2) (k+1/k)
TC* = (DC0CC/2)

TC/TC* = (k+1/k)
b) If CC = 1.2 CC* TC = 2DC(1.2) CC TC/TC* = 1.2
TTN-DoMS, IIT-MADRAS

Problem 2
M/s Gujjubhai Shah and company is an old firm where scientific inventory management is totally unknown. For a certain raw

material that they buy, it is estimated that each purchase order

would cost Rs.200/-. The cost of the raw material is Rs.30 per

kg; the annual inventory carrying cost is 10 per cent of the cost
per kg; the monthly requirement is 100 kg. The ordering quantity has been arbitrarily fixed as 440kg. If this ordering quantity is to be optimum by fluke, what should be the value of the shortage cost, assuming that shortages can be allowed?
TTN-DoMS, IIT-MADRAS

Co = Rs.200 ; C = Rs.30
I = 14% per year D = 100 kg/Month = 1200 Kg/year Q = 440 ; CS = ? Q = (2DCo/Cc) (1 + Cc + Cs) 440 = (2*1200*200/4.2)(1 + 4.2/Cs) Cs = 6.052

TTN-DoMS, IIT-MADRAS

Problem 3
Marchand and Wadichand Fabrics run a huge show room for Readymade Garments. The Show room is famous for garments made of a certain variety of cotton. The firm has a quarterly requirements of 2000 metres length of this variety of cloth, which costs Rs.38/per metre.
The proprietors have made a precise estimate of their ordering cost thirty two rupees, thirty paise per order. The carrying cost per year is estimated to be 8.5 per cent of the cost per metre length. Marchands son Lalit Chand, who has recently joined the business after completing his MBA, insists that they would procure the cloth in economic order quantities. However, their supplier, Naidu Garu Textile Mills, Coimbatore, is not willing to sell less than 2000 metres of the cloth per order. What is the discount on the unit cost that Lalit Chand should demand in order to give up his insistence on EOQ?
TTN-DoMS, IIT-MADRAS

Demand = 2000 m/quarter D = 8000 per year C = Rs.38 Co = Rs.32.30

i = 8.5%
Cc = 38*8.5/100 = 3.23

Q* = (2DCo/Cc)
= 2*8000*32.30/3.23 = 400 TC = (2DCoCc) + 8000*38 = 305292 Let discount be d% Cc = 38*8.5(1-d)/100

= Rs.3.23(1-d)

TTN-DoMS, IIT-MADRAS

TC (With discount) = 8000*32.3/2000 + 8000*38*(1-d) + 2000*38*8.5*(1-d)/2*100 =129.2+3230(1-d)+304000(1-d) 307230(1-d) = 305292 - 129.2

1-d = 0.9937
d = 0.0063 i.e. 0.63% discount

TTN-DoMS, IIT-MADRAS

Problem 4
The Central Supplied Unit, IIT, Madras is considering quotations from three vendors to whom it has to place orders for rice. Eskay Provision Stores quotes Rs.120/- per bag irrespective of the quantity ordered. Beavy and Company will accept orders only for 800 or more bags but quotes a price of Rs.108/- per bag. Bellam Trading Co. will accept orders only for 1000 or more bags at Rs.100/- per bag. The total requirement of the twelve hostels, for whom the CSU buys, is 3000 bags per semester. Inventory carrying costs are 20 per cent of unit cost and ordering cost for the CSU Rs.400/per order. If you were the Hostel Affairs Secretary, which vendor should you recommend to the Warden, CSU, for placing the orders and for what quantity per order?
TTN-DoMS, IIT-MADRAS

D = 3000 per semester = 6000 per year Co = Rs.400 i = 20% = 0.2 Vendor 1 C = Rs.120 EOQ = (2*6000*400/0.2*120) = 447.21 TC = (2DCoCc) = (2*6000*400*0.2*120) = 10733.126

TTN-DoMS, IIT-MADRAS

Vendor 2 C = Rs.108 Q = 800 or more EOQ = (2*6000*400/0.2*108) = 471.40

TC = (6000/800)*400 + (800/2)*0.2*108 = 3000 + 8640

=11640

Vendor 3 C = Rs.100
Q = 1000 EOQ = (2*6000*400/0.2*100) = 489.89 At Q = 1000 , TC = (6000/1000)*400 + 1000*0.2*100/2 =2400 + 10000 = 12400 Hence Vendor1 is chosen with an order quantity of 447.21 bags
TTN-DoMS, IIT-MADRAS

Problem 5
A company carries an inventory composed of two products A and B for which there is a uniform yearly demand of 10,000 and 20,000 units respectively. Product A costs the company Rs.2/unit to purchase, Rs.1/unit/year to store, and Rs.100 in administrative costs every time it is reordered. Product B costs the company Rs.4/unit to purchase, Rs.2/unit/year to store, and Rs.200 in administrative costs for each reorder. a) Set up the total cost equations for each product separately and solve for their optimum order quantities. b) Owing to a liquidity problem, the company requires that the average yearly investment in inventory for the two products taken together be less than or equal to Rs.6000/-. Is the answer found in part (a) consistent with this added constraint? c) Find the optimum solution when the average yearly investment in inventory must be less than or equal to Rs.5000. Average yearly investment is the rupee value of the average amount of inventory present.
TTN-DoMS, IIT-MADRAS

D = 1000 C1 = Rs.2 CC1 = Rs.1 CO1 = Rs.100

D2 = 20000 C2 = Rs.4 CC2 = Rs.2 CO2 = Rs.200

a) Q1* = ( 2*10000*100/1) = 1414.2

TC1 = D1CO1 /Q1 + Q1* CC1/2 Q1* = (2D1CO1/ CC1)

Q2* = ( 2*20000*200/2) = 2000

TC2 = D2CO2 /Q2 + Q2* CC2/2 Q2* = (2D2CO2/ CC2)

b) Amount invested in inventory (average)

= Q1C1/2 + Q2C2/2 = (1414.2*2)/2 + (2000*4)/2 = 1414.2 + 4000 = 5414.2 6000 Answer found in part (a) is consistent with the added constraint
TTN-DoMS, IIT-MADRAS

c) If inventory 5000, it is binding. We setup the lagrangean function L = D1CO1/Q1 + Q1CC1/2 + D2CO2 /Q2 + Q2 CC2/2 + (Q1C1/2 + Q2C2/2 6000) = 1000*100/Q1 + 1*Q1/2 + 2000*200/Q2 + 2*Q2/2 + (2*Q1/2 + 4*Q2/2 - 6000)

L/Q1=0 gives
-1000*100/Q12 + + = 0 1000*100/Q12 = ( + )

L/Q1 = 0 Q1 = 100000/( + )
L/Q2 = 0 Q2 = 400000/(1 + ) L/ = 0 Q1 + 2Q2 = 6000
TTN-DoMS, IIT-MADRAS

Let ,
= 0 = 1.0 = 0.2 = 0.15 Q1 = 1414.2 Q1 = 816.5 Q1 = 1195.2 Q1 = 1240.3 Q2 = 2000 Q2 = 1825.7 Q1 + 2Q2 = 5414.2 Q1 + 2Q2 = 4846.7 Q2 = 1414.2 Q1 + 2Q2 = 3644.9 Q2 = 1865.01 Q1 + 2Q2 = 4970.37

= 0.13
= 0.14

Q1 = 1259.88
Q1 = 1250

Q2 = 1881.4

Q1 + 2Q2 = 5022.7

Q2 = 1873.17 Q1 + 2Q2 = 4996.34

The order quantities are 1250 and 1873 respectively.

TTN-DoMS, IIT-MADRAS

Problem 6
A shop sells two products that it orders periodically from one supplier. The demand rates for both products are predictable and constant. Demand rates and inventory costs are given by the following table:
Product A Demand rate Units/month 100 Order cost Rs./order 50 Holding cost Rs./Unit/Month 25

300

50

a) Find the optimum values of the inventory cost per month and the length of both inventory cycles under the assumption that both inventory processes are managed separately. b) The shop finds that they could save on the order cost of product B if both products were ordered together. This course of action can be evaluated by finding the minimum total inventory cost per month, subject to the constraint that the two inventory periods be equal.
TTN-DoMS, IIT-MADRAS

Write the objective function and the constraint. Show how to solve this by Lagrange Multiplier method.

Product A CO1 = Rs.50 CC1 = 2.50

D1 = 100 per month

Q1* = (2D1CO1/ CC1) = ( 2*100*50/2.5) = 63.24 N = D/Q = 100/63.24 = 1.581 TC1 = (2DCo/Cc) = (2*100*50*2.5) = 158.1139

Product B
CO2 = Rs.50 CC2 = 3.0

D2 = 300

Q2* = ( 2*300*50/3) =100 N=3

TC2 = 300

Time periods are different

TTN-DoMS, IIT-MADRAS

b) We assume that we can save order cost of B if they are ordered together. The periods have to be equal D1 / Q1 = D2 / Q2 L = (D1/Q1)*50 + Q1* CC1/2 + Q2* CC2/2 + (D2/Q2 - D1/Q1)

L/Q1 = 0 gives -50D1/Q12 + CC1/2 + (D1/Q12) = 0

Q1 = (2D1 (-+50)/ CC1) = 80(50-)

L/Q2 = 0 gives CC2/2 - (D2/Q22) = 0

Q2 = 2D2/CC2 = 200 L/ = 0 gives 100/Q1 = 300/Q2 Q1 /Q2 = 3 200 = -720 + 720*50 Q1 = 29.49 = 720*50/920 = 39.13

Q2 = 88.46
TTN-DoMS, IIT-MADRAS

Problem 7
Messrs. Ghatilkar and Pillkarni Chemicals Private Ltd., own a plant in Chembur which processes three chemicals in liquid form for consumption within the factory itself at a uniform rate. The following are the particulars relating to the three items:
Item Annual consumption in litres Cost per Processing Time for Litre (Rs.) 100 Litres 36,000 30,000 50,000 20 40 20 2 hours 13 1/3 min. 3 hours 20 min. 1 hour 36 min.

1. 2. 3.

Setting up the plant to start production of any of these items takes 8 hours for every set up. However, during set-up the plant is not productively engaged; the estimated cost of the idleness of the plant due to set up is Rs.100/- per hour. The company works on a two-shifts-5 day week basis for 50 weeks, the remaining 2 weeks being the annual shut down period for maintenance work. Each shift is of 8 hours duration.
TTN-DoMS, IIT-MADRAS

The inventory carrying charges per year are 10 per cent of the cost per litre for each chemical.
The chemicals processed by the plant are collected and stored in 10-litres cans. On an average how many such cans should be made available, if the company desires to turn out these chemicals in economic manufacturing quantities? Suppose there are only 500 cans available, and assuming that the average requirement of cans should never exceed this number, how should the economic manufacturing quantities be modified to satisfy this restriction?

TTN-DoMS, IIT-MADRAS

Three items A,B,C

Item A
D = 36000 CO = Rs.100 per hour *8hrs = Rs800

Item B
D = 30000 CO = Rs.800

C = 20
i = 10% CC = Rs.2 P = 350*16*60*3*100/400 = 25200 litres

C = 40
i = 10% CC = Rs.4 P = 350*16*60*100/200 = 168000 litres

Q = {2DCO/ CC(1-D/P)}
= {2*3600*800/2(1-36/252)} = 5796.55 litres

Q = {2*30000*800/2(1-30/168)}
= 3822.132 litres

No. of cans = 5796.55/20 = 289.83 cans

TTN-DoMS, IIT-MADRAS

No. of cans = 191.11 cans

Item C

D = 50000
CO= Rs.100 per hour *8hrs = Rs.800

C = 20
CC = Rs.2 P = 350*16*60*100/96 = 350000 litres No. of cans = 341.56 cans Total cans required = 289.83 + 191.11 + 341.56 = 822.5 Only 500 cans are available

TTN-DoMS, IIT-MADRAS

Lagrangean L = 3600*800/Q1 + (Q1)2*0.857/2 + 30000*800/Q2 + Q2*4*0.821/2 + 50000*800/Q3 + (Q3)2*0.857/2 + (Q1+ Q2 + Q3 /20 500) L/Q1 = 0 -36000*800/Q12 + 0.857 + /20 = 0 36000*800/Q12 = (17.14 + )/20 Q1 Q2 Q3 Q1 = {36000*800*20/(17.14 + )} = {30000*800*20/(32.84 + )} = {50000*800*20/(17.14 + )} + Q2 + Q3 = 10000

Solving we get = 34 Q1 = 3356 Q2 = 2680 Q3 = 3955

TTN-DoMS, IIT-MADRAS

Problem 8
M/s Kanjivellam Enterprises Pvt. Limited own a medium-sized factory divided into 3 manufacturing shops. The factory makes three products A, B and C. Manufacturing one unit of A requires 2 hours at Shop I, 1 hour at Shop II and 2 hours at Shop III. Manufacturing one unit of B requires 3 hours at Shop II and 2 hours at Shop III. Manufacturing one unit of C requires 1 hour at Shop I and 2 hours at Shop III. The available capacities for shops, I, II, and III are 90 machinehrs. 120 machine-hours and 220 machine-hours respectively. The profits per unit of A, B and C are Rs.5/-, Rs.5/- and Rs.3/respectively. What is the optimal weekly product-mix that maximises the total profit of M/s Kanjivellam Enterprises Pvt. Ltd.,?
TTN-DoMS, IIT-MADRAS

Some of the components required for the products A, B and C are bought from outside sources and assembled at the factory. The following particulars are available from the design specifications of the product.

Each Unit of A requires 2 units of component `P

Each Unit of B requires 3 units of component `Q Each Unit of C requires 2 units of `P and 3 units of `R The cost per unit of the components P, Q and R given as Rs.5/and Rs.4.20/- and Rs.3/-, in that order.

The factory works 50 weeks in a year. Given that the cost of placing an order is Rs.50/- and the inventory carrying cost is 20 per cent of the unit cost, find the optimal ordering quantity for the components P, Q, and R subject to the restriction that the total average inventory does not exceed Rs.5000/-.
TTN-DoMS, IIT-MADRAS

Let x1, x2, x3 be quantities of A, B, and C respectively

Maximize 5x1 + 5x2 + 3x3 2x1 +x3 90 x1 +3x2 120 2x1 +2x2 +2x3 220 x1, x2 , x 3 0 P reqd = 2x1 +2x3 = 150/week Q reqd = 3x2 = 105/week R reqd = 3x3 = 180/week
Item P D =150*50 = 7500 CO = 50 i = 20% of Rs.5 = Rs.1 Q = {2DCO/CC = {2*7500*50/1} = 866.02 QC/2 = 2165.06 Item Q D = 105*50 = 5250 CO= 50 CC = 20% of Rs4.20 = Rs.0.84 Q =790.57 QC/2 = 1660.20

TTN-DoMS, IIT-MADRAS

Item R D = 180*50 = 9000 CO = 50 CC = 20% of Rs.3 = Rs.0.60

Q = {2DCO/ CC = {2*9000*50/0.6} = 1224.75

QC/2 = 1837.117 Budget = 2165.06 + 1660.20 + 1837.12

= 5662.373
Violates budget restriction New values of order quantities are Item P = 866.02*5000/5662.373 = 764.71 Item Q = 790.57*5000/5662.373 = 698.09 Item R = 1224.75*5000/5662.373 = 1081.48
TTN-DoMS, IIT-MADRAS

Problem 9
Messrs. Spoilda Soil Fertilizer Company has undertaken a contract to supply 50 tons of fertilizer at the end of the first month, 70 tons at the end of the second month and 90 tons at the end of the third month. The cost of producing X tons of fertilizer in any month is given by (4500X + 20X2) Rupees The company can produce more amount of fertilizer in any month and supply it in the next month. However, there is an inventory carrying cost of Rs.400/- per ton per month. Formulate the problem of finding the optimal level of production in each of the three periods and the total cost incurred as a dynamic programming problem and solve. Assume initial and final inventory to be equal to Zero.
TTN-DoMS, IIT-MADRAS

This problem can be solved by forward recursion.

Stage : Each month States : Inventory carried from the previous month Decision Variable: Quantity to be produced each month Criterion : Minimize cost

X1 Initial Inventory = 0 Month 1 S1

X2 S2 Month 2

X3

Month 3

TTN-DoMS, IIT-MADRAS

n = 1; 2 more months remaining: f1(0,X1) = 20X12 + 4500X1 f1*(0) = min {20X12 + 4500X1} = 20(50 + S1)2 + 4500(50 + S1) = 20(2500 + S12 + 100S1) + 225000 + 4500S1 = 275000 + 20S12 + 6500S1 at X1* = 50 + S1 n = 2; 1 more month remaining: f2(S1,X2) = 20X22 + 4500X2 + 400S1 + f1*(0) = 20X22 + 4500X2 + 400S1 + 275000 + 20S12 + 6500S1 f2*(S1) = min {20X22 + 4500X2 + 400S1 + 275000 + 20S12 + 6500S1} = 20(70 + S2 S1)2 + 4500(70 + S2 S1) + 400S1 + 275000 + 20S12 + 6500S1 = 688000 + 40S12 + 20S22 - 400S1 + 7300S2 - 40S1S2 at X2* = 70 + S2 - S1
TTN-DoMS, IIT-MADRAS

n = 3; last month: f3(S2,X3) = 20X32 + 4500X3 + 400S2 + f2*(S1) = 20X32 + 4500X3 + 400S2 + 688000 + 40S12 + 20S22 - 400S1 + 7300S2 - 40S1S2 f3*(S2) = min {20X32 + 4500X3 + 400S2 + 688000 + 40S12 + 20S22 - 400S1 + 7300S2 - 40S1S2} = 20(90 - S2)2 + 4500(90 S2) + 400S2 + 688000 + 40S12 + 20S22 - 400S1 + 7300S2 - 40S1S2 = 1255000 + 40S12 + 40S22 - 40S1S2 - 400S1 - 400S2 at X3* = 90 - S2

Differentiating with S1 and S2 and solving the equations we get, S1 = 10 and S2 = 10

Hence, X3* = 80 X2* = 70 X1* = 60 Total cost = 12,51,000
TTN-DoMS, IIT-MADRAS

Problem 10
Consider the problem of determining economic lot sizes for four different items. Assume that the demand occurs at a constant rate over time. The constant order quantity for the jth item is denoted by Qj. The total storage space available is A, where each unit of jth item occupies an area aj. The objective is to find the Qjs which minimize the total cost subject to the total area constraint. The total cost is of the form. Uj 4 TC = j=1 -------- + VjQj , Qj > 0 Qj Where Uj and Vj are constants. Formulate the problem as a dynamic programming model. Assume, if necessary, that Qj is discrete.
TTN-DoMS, IIT-MADRAS

Stage : Each item State : Area remaining for the last n items Decision Variable: How much to order Criterion : Minimize cost

n = 1; last item:
f1(S1,Q1) = U1 + V1Q1
Q1

f1*(S1) = Min

0 Q1

S1 a1

U1 Q1

+ V1Q1

= Min

U1 , S1 Q1 a1
TTN-DoMS, IIT-MADRAS

n = 2; two more items:

f2(S2,Q2) = U2 + V2Q2 + f1*(S2 Q2a2)

Q2

In general, the recursive relation is fn(Sn,Qn) = Un + VnQn + fn-1*(Sn Qnan)

fn*(Sn) = Min
Qn
0 Qn
Sn an

Un Qn

+ VnQn + fn-1*(Sn Qnan)

For the final stage (n = 4),

Sn = A

[The total storage space available ]

TTN-DoMS, IIT-MADRAS

Thank You !!!