CHAPTER 13:

INVENTORY MANAGEMENT
Teaching Notes
This is a fairly long and important chapter. The key points are:
1.

Good inventory management is important for successful organizations.

2.

The key issues are when to order and how much to order.

3.
Because all items are not of equal importance, it is necessary to establish a classification
system (the ABC) for allocating resources for inventory control.
4.
EOQ models answer the question of how much to order. Variations of the basic EOQ
model include the quantity discount model and the economic run size model.
5.
EOQ models tend to be rather robust: even though one or more of the parameters may be
only roughly correct, the model can yield a total cost that is close to the actual minimum.
6.
ROP models are used to answer the question of when to order. Different models are used,
depending on whether demand, lead time, or both are variable.
7.

Other models described are the fixed interval model and the single period model.

8.

All of the models in this chapter pertain to independent demand.

The Single-Period Model is used to handle ordering of perishables (such as fresh fruits and vegetables,
seafood, and cut flowers) as well as items that have a limited useful life (such as newspapers and
magazines). Analysis of single-period situations generally focuses on two costs: shortage and excess.
Shortage costs may include a charge for loss of customer goodwill as well as the opportunity cost of lost
sales or unrealized profit per unit. Excess cost pertains to items left over at the end of the period and is the
difference between purchase cost and salvage value. There may be costs associated with disposing of
excess items which would make the salvage value negative and hence increase the excess cost per unit.

Answers to Discussion and Review Questions

1.
Inventories are held (1) to take advantage of economic lot sizes, (2) to provide a certain
level of customer service in the form of safety stock, (3) because production requires some inprocess inventory to decouple processes, (4) to hedge against price increases, and (5) to meet
seasonal demand.
2.
Effective inventory management requires cost information, information on demand and
lead time (amounts and variabilities), an accounting tracking system, and a priority system (e.g.,
A-B-C).
3.
Carrying or holding costs include interest, warehousing, obsolescence, and so on.
Ordering costs relate to determining how much is needed, vendor analysis, inspection of receipts
and movement to temporary storage, and paying invoices. Shortage costs refer to opportunity
costs incurred through failure to make a sale due to lack of inventory.
4.
It may be inappropriate to compare the inventory turnover ratios of companies in
different industries because the production process, requirements and the length of production run
varies across different industries. The shorter the production time, the less the need for inventory.

Instructors Manual, Chapter 13

215

In addition, the material delivery lead times may vary between different industries. The higher the
variability of lead time and the longer the lead time, the greater the need for inventory. As
supplier reliability increases, the need for inventory decreases. The industries with higher forecast
accuracies have less of a need for inventories.
5.
The total cost curve is relatively flat in the vicinity of the EOQ, so that there is a zone
of values of order quantity for which the total cost is close to its minimum. The fact that the EOQ
calculation involves taking a square root lessens the impact of estimation errors. Also, errors may
cancel each other out.
6.
As the carrying cost increases, holding inventory becomes more expensive. Therefore, in
order to avoid higher inventory carrying costs, the company will order more frequently in smaller
quantities because ordering smaller quantities will lead to carrying less inventory.
7.
Safety stock is inventory held in excess of expected demand to reduce the risk of stockout
presented by variability in either lead time or demand rates.
8.
Safety stock should be large when large variations in lead time and/or usage are present.
Conversely, small variations in usage or lead time require small safety stock. Safety stock is zero
when usage and lead time are constant, or when the service level is 50 percent (and hence, z = 0).
9.
Service level can be defined in a number of ways. The text focuses mainly on the
probability that demand will not exceed the amount on hand. Other definitions relate to the
percentage of annual demand satisfied from inventory.
Increasing the service level requires increasing the amount of safety stock.
10.
The A-B-C approach refers to the classification of items stocked according to some
measure of importance (usually cost x volume) and allocating control efforts on that basis.
11.
Larger order size would be more appropriate; although obsolescence may also be a factor.
The purchasing agent needs to question the supplier for justification of price increase, and if so,
for enough warning ahead of time.
12.
As setup time decreases, annual set up cost decreases, resulting in lower run size, which
results in lower average amount of inventory. Overall inventory costs would decrease.
13.
The Single-Period Model is used when inventory items have a limited useful life (i.e.,
items are not carried over from one period to the next). It is useful to model purchasing perishable
items.
14.
Yes. When excess costs are high and shortage costs are low, the optimum stocking level
is less than expected demand.
15.

A company can reduce the need for inventories by:

a.
b.
c.
d.
e.
f.
g.
h.

216

using standardized parts, and developing simpler product designs with fewer parts
improving forecasting of demand and reducing forecast error
using preventive maintenance on equipment and machines
reducing supplier delivery lead times and increasing delivery reliability
reducing ordering cost by using tools such as EDI
smoothing out demand by demand management so need for seasonal production is reduced
reducing production lead time by using more efficient manufacturing methods
smoothing out parts of production so need for decoupling inventory is reduced

Operations Management, 2/ce

i.

Use Future's markets to hedge your requirements, so that there is no need to carry inventory
in anticipation of price hikes

Memo Writing Exercises

1. The memo should include the functions that inventory plays in your company. It is okay to try to
minimize inventory, but the causes of need for inventory should be addressed at the same time.
For example, setup times should be reduced.
2.

The possible advantages of using a single supplier include:

a. obtaining a discount due to additional volume purchased from the supplier
b. building trust and working with the supplier so that the material will be delivered in a timely
fashion to avoid stockouts and excess inventory
c. Reduced cost of inventory replenishment
The possible disadvantages of using a single supplier include:
a. More safety stock needs to be carried when using fixed order interval model
b. Longer period of risk of stockout

Solutions
Embedded Excel Worksheet
1.
Cumul
% of cumul
Usage * Usage *
usage*
%
Item 2 Usage
Unit Cost Unit cost unit cost
unit cost
of items
0
4021
50 4.3$1,400
$70,000
$70,000
35%
11%
4.1
4.2
4.4
4.5
4.6
4.7
4.8
4.9
Mor e
4400
7,000
$5 $35,000 $105,000
53%
22%
6
4

6850
4066
4050

2,000
40
80

$15
$700
$140

9280
3010
9402
6500

10
400
300
150

$1,020
$20
$12
$20

$30,000 $135,000
$28,000 $163,000
$11,200 $174,200
$10,200
$8,000
$3,600
$3,000

$184,400
$192,400
$196,000
$199,000

Class
A
A

68%
82%
88%

33%
44%
56%

B
B
B

93%
97%
98%
100%

67%
78%
89%
100%

C
C
C
C

2.
The following table contains figures on the monthly volume and unit costs for a random
sample of 16 items for a list of 2,000 inventory items.

Instructors Manual, Chapter 13

217

Solutions (continued)

Embedded Excel Worksheet

Frequency

a.
Usage
800
4.4
200
600

Cost *
Usage
$24,000
4.5
4.6
$16,000
$15,000

6
4

2
Item
Unit Cost
0
F95
$30
4.1
4.2
Z45
$80
K35
$25

4.3

Cumul % Cumul
Cost *
Cost*
Usage
Usage
$24,000
25%
4.7
4.8
4.9
More
$40,000
42%
$55,000
58%

%
Cumul
items
6%
13%
19%

P05
F14
D45
K36
D57

$16
$20
$10
$36
$40

500
300
550
150
120

$8,000
$6,000
$5,500
$5,400
$4,800

$63,000
$69,000
$74,500
$79,900
$84,700

67%
73%
79%
85%
90%

25%
31%
38%
44%
50%

K34
D52
M20
F99
N08
D48
M10
P09

$10
$15
$20
$20
$30
$12
$16
$10

200
110
80
60
40
90
25
30

$2,000
$1,650
$1,600
$1,200
$1,200
$1,080
$400
$300

$86,700
$88,350
$89,950
$91,150
$92,350
$93,430
$93,830
$94,130

92%
94%
96%
97%
98%
99%
100%
100%

56%
63%
69%
75%
81%
88%
94%
100%

A-B cut off: % Cumul Cost*usage says cutoff at 70-80%

% Cumul items says cutoff at 15-20%
There is a big drop between 3rd and 4th item
Two out of three agree with cut off between 3rd and 4th.
B-C cut off: % Cumul Cost*usage says cutoff at 90-95%
% Cumul items says cutoff at 40-50%
There is a big drop between 8th and 9th item
All agree with cut off between 8th and 9th.

More control on As and least on Cs. For example, As could be ordered weekly, Bs
monthly, and Cs quarterly. It might be important for some reason other than dollar usage,
such as cost of a stockout, sole sourcing, becoming obsolete, etc.
3.

D = 4,860 bags/yr.
S = $10
H = $5
2DS
a. Q =
H

2(4,860)10
= 139.4 bags, round to 140
5

b. Q/2 = 140/2 = 70 bags

c.

D
=
Q

4,860 bags
140 bags/orders

d. TC = Q/2 H +

218

D
Q

= 34.7 orders 35 orders

Operations Management, 2/ce

Solutions (continued)
=

140
2

4,860
(10) = 350 + 347 = $697
140

(5) +

2(4,860)15
5

e. Using S = $15, Q =
EOQ increases by
4.

= 170.8 170

170 - 140
= 21%
140

D = 40/day x 260 days/yr. = 10,400 packages

S = $6 H = $1
2DS
2(10,400)6
a. Qo =
=
= 353.3 = 353
1
H
Q
2

b. TC =
=

H+

353
(1) +
2

D
S
Q

10,400
353

(6) = 176.5 + 176.77 = $353.27

c. Yes
d. TC400 =

400
(1) +
2

10,400
(6)
400

= 200 + 156
= 356 (No, only $2.73 higher than with EOQ, so 400 is acceptable.)
5.

D = 750 pots/mo. x 12 mo./yr. = 9,000 pots/yr.

Price = $2/pot S = $20 H = ($2)(.30) = $.60/unit/year
Qo =

2DS
=
H

TC =

775
2

2(9,000)20
= 774.60 775 pots
.60

(.60) +

9,000
(20)
775

TC = 232.50 + 232.26
= 464.76
If Q = 1500
TC

1,500
9,000
(.6)
( 20)
2
1,500

Instructors Manual, Chapter 13

219

Solutions (continued)
TC = 450 + 120 = $570
Therefore the additional cost of staying with the order size of 1,500 is:
$570 $464.76 = $105.24
6.

800/month, so D = 12(800) = 9,600 crates/yr.

H = .35P = .35($10) = $3.50/crate per yr.
S = $28
800
9600
Present TC:
(3.50) +
(28) = $1400 + 336 = $1,736
2
800
a.

Qo =

2DS
=
H

2(9,600)$28
= 391.92 [round to 392]
$3.50

39
9,60
0 (28) = 686 + 685.71 = $1,371.71.
TC at EOQ: 2 (3.50) +
2
392
Savings approx. $364.29 per year.
7.

H = $2/month
S = $55
D = 100/month
2DS
2(100)55
a.
Qo =
Qo =
= 74.16
2
H
Note: You can use monthly demand in EOQ, so long as it is also monthly.
b. Discount of $10/order is equivalent to S - 10 = $45 (revised ordering cost)
TC74 =

74
100
(2) +
(55) = 74 + 74.32 = $148.32 per month
2
74

TC50 =

50
100
(2) +
(45) = 50 + 90 = $140* per month
2
50

10
100
0 (2) +
(45) = 100 + 45 = $145 per month
2
100
Yes, order size of 50.
TC100 =

8.

D = 27,000 jars/month
H = $.06/month
S = $20
a.

Q=

2DS
=
H

2(27,000)20
.06

TC4,000
TC = Q H + D S =

= 4,242.64 4,243.
4000
2

220

(.06)+

27000 .(20) = 120 + 135 = $255

4000

Operations Management, 2/ce

TC4,243
=

4243
2

Instructors Manual, Chapter 13

27000
(.06)+

(.20) = 127.29 + 127.27 = $254.56

4243

221

Solutions (continued)
$255
-$254.56
$.44 (Difference)
b. Current:
For

D
to equal 10, Q must be 2,700
Q

Q=

9.

D
27,000
=
= 6.75
Q
4,000

2DS
So 2,700 =
H
Solving, S = $8.10

p = 5,000 wieners/day
u = 250 wieners/day
300 days per year
S = $22
H = $.15/wiener per yr.
a. Qo =

2DS
H

2(27,000)S
.06

D= 250/day x 300 days/yr. = 75,000 wiener/yr.

p
=
p-u

2(75,000)22
.15

5,000
= 4,812.27 [round to 4,812]
4,750

b. D/Qo = 75,000/4,812 = 15.59, or about 16 runs/yr.

c. run length: Qo/p = 4,812/5,000 = .96 days, or approximately 1 day
10. p = 50 tonnes/day
u = 20 tonnes/day
200 days/yr.
S = $100
H = $50/tonne per yr.
a. Qo =

2DS
H

b. Imax =

Q
163.30
(p-u) =
(30) = 97.98 tonnes
p
50

Average is
c. Run length =

222

D = 20 tonnes/day x 200 days/yr. = 4,000 tonnes/yr.

p
=
p-u

2(4,000)100
50

50
= 163.30 tonnes [1633 bags]
50 - 20

Imax
97.98
:
= 48.99 tons [approx. 490 bags]
2
2
Q
p

163.39
= 3.27 days
50

Operations Management, 2/ce

Solutions (continued)
d. Runs per year:
e.

Q' =

TC =

D
4,000
=
= 24.5
Q
163.30

2(4000)(25)
50
81.65 tonnes
50
50 20

Imax
D
2 H+ Q S

81.65
(50 20) 48.99
50
48.99
Avg. inventory
24.49
2
I m ax

4000
(100) $4898.98
163.30
4000
(25) $2449.24
TCrev. = (24.49)(50)
81.65
Note: TCrev is half TCorig because $ was reduced 4 times.
TCorig. = (48.99)(50)

Savings would be approximately $2450

11. S = $300
D = 20,000 (250 days x 80 = 20,000)
H = $10 / unit / year
p = 200/day
u = 80/day
a. Qo =

2DS
H

p
=
p-u

2(20,000)300
10

200
=
200-80

Qo = (1,095.44) ( 1.2910) = 1,414.2 units or 1,414 units

b. Imax =

Q
1,414
(p-u) =
(200 - 80) = 848.4 units
p
200

Run length =

Q
p

1,414
= 7.07 days
200

c. 200 - 80 = 120 units per day

d. Qo 1414

17.7 days
u
80
Yes, after making this component for 7 days, can make the other for 10 days, then make this
component again.
12. p = 800 units per day
u = 300 units per day, p = 300 x 250 = 75,000/year
Q0 = 2000 units
a. Number of batches of heating elements per year =

75,000
37.5 batches per year
2,000

b. The number of units produced in two days = (2 days)(800 units/day) = 1600 units
The number of units used in two days = (2 days) (300 units per day) = 600 units
Current inventory of the heating element = 0
Inventory build up after the first two days of production = 1,600 - 600 = 1,000 units
Total inventory after the first two days of production = 0 + 1,000 = 1,000 units.

Instructors Manual, Chapter 13

223

Solutions (continued)
c. Maximum inventory or Imax can be found using the following equation:
p u
800 300
I max Q0
(2,000)(.625) 1, 250 units
2,000
800

p
I
1, 250
Average inventory max
625 units
2
2
d. Production time per batch =

Q 2, 000

2.5 days
P
800

Setup time per batch = 1/2 day

Total time per batch = 2.5 + 0.5 = 3 days
Since the time of production for the second component is 4 days, total time required for both
components is 7 days (3 + 4). Since we have to make 37.5 batches of the heating element per
year, we need (37.5 batches) x (7 days) = 262.5 days per year.
262.5 days exceed the number of working days of 250, therefore we can conclude that there is
not sufficient time to do the new component (job) between production of batches of heating
elements.
An alternative approach for part d is:
The max inventory of 1,250 will last 1250/300 = 4.17 days
4.17 - .50 day for setup = 3.67 days. Since 3.67 is less than 4 days, there is not enough time.
13.

D = 18,000 boxes/yr.
S = $32
H = $.20/box per yr.
a. Qo =

2DS

2(18,000)32
2,400 boxes
.20

Since this quantity is feasible in the range 2,000 to 4,999, its total cost and the total cost of all lower
price breaks (i.e., 5,000 and 10,000) must be compared to see which is lowest.
TC2,400 =

2,400
18,000
(.20)
($32) $1.20(18,000) $22,080
2
2,400

TC5,000 =

5,000
18,000
(.20)
($32) $1.18(18,000) $21,855 .2
2
5,000

TC10,000 =

10,000
18,000
(.20)
($32) $1.15(18,000) $21,757.6 [lowest]
2
10,000

Hence, the best order quantity would be 10,000 boxes.

To

2,400

5,000

10,000
Quantity

224

Operations Management, 2/ce

Solutions (continued)
b.
14.

D 18,000

1.8 orders per year

Q 10,000

a. S = $48
D = 25 stones/day x 200 days/yr. = 5,000 stones/yr.
Quantity
1 - 399
400 - 599
600 +
TC490 =

Unit Price
$10
9
8

a. H = $2
2DS
=
H

Q=

2(5,000)48
= 489.90 490
2

490
5,000
2+
48 + 9 (5,000) = $45,980
2
490

600
5,000
2+
48 + 8 (5,000) = $41,000
2
600
600 is optimum.
b. H = .30P
2(5,000)48
EOQ$8 =
= 447.1
.30(8)
TC600 =

(Not feasible at $8/stone)

EOQ$9 =

2(5,000)48
= 421.6 422
.30(9)

(Feasible)
Compare total costs of the EOQ at $9 and lower curves price break:
Q
D
TC =
(.30P) +
(S) +PD
2
Q
TC422 =

422
[.30($9)] +
2

5,000
422

422

447 600

($48) + $9(5,000) = $46,138.4

600
5,000
[.30($8)] +
($48) + $8(5,000) = $41,120
2
600
Since an order quantity of 600 would have a lower cost than 422,
600 stones is the optimum order size.
c. ROP = 25 stones/day (6 days) = 150 stones.
TC600 =

15.

Range
0-999

P
$5.00

H
$2.00

H = .4P

1,000-3,999

4.95

1.98

S = $50

4,000-5,999

4.90

1.96

6,000+

4.85

1.94

D = 4,900 pulleys/yr.

Instructors Manual, Chapter 13

Q0
2(4900)(50)
495
$2
2(4900)(50)
497.5 NF
1.98
2(4900)(50)
500 NF
1.96
2(4900)(50)
502.6 NF
1.94

225

Solutions (continued)
Compare TC495 with TC for all lower price breaks:
495
4,900
TC495 =
($2) +
($50) + $5.00(4,900) = $25,490
2
495
1,000
4,900
TC1,000 =
($1.98) +
($50) + $4.95(4,900) = $25,490
2
1,000
4,000
4,900
TC4,000 =
($1.96) +
($50) + $4.90(4,900) = $27,991.25
2
4,000
6,000
4,900
TC6,000 =
($1.94) +
($50) + $4.85(4,900) = $29,625.8
2
6,000
Hence, one would be indifferent between 495 or 1,000 units.

TC

495 497 500 503

1,000

4,000

6,000

Quantity

16.

D = (800) x (12) = 9600 units

S = $40

H = (25%) x P

For Supplier A:
2(9600)(40)
Q13.6
475.27 (not feasible)
(.25)(13.6)
Q13.8

2(9600)(40)
471.81 (feasible, round to 472)
(.25)(13.8)

9600
472
(40)
(.25)(13.8) (13.8)(9600)
472
2
813.56 814.2 132, 480

TC472

$ 134,107.76
9600
500
(40)
(.25)(13.6) (13.6)(9600)
500
2
768 850 130,560

TC500
TC500

TC500 $132,178 *
Solutions (continued)

226

Operations Management, 2/ce

For Supplier B:
Q13.7

2(9600)(40)
473.53 (feasible, round to 474)
(.25)(13.7)

9600
474
(40)
(.25)(13.7) (13.7)(9600)
474
2
810.13 811.72 131,520
$133,141.85

TC474

Since $132,178 < $133,141.85 choose supplier A.

The optimal order quantity is 500 units.
17.

D = 3600 boxes per year

Q = 800 boxes (recommended)
S = $40 /order
H = $.40 /order

Range
1-199
200-800
801+

P
$1.20
$1.10
$1.00

If the firm decides to order 800, the total cost is computed as follows:
D
Q
TC H S (P * D)
2
Q
800
3,600

$.40

$40 (3600 x1.1)

2
800

160 180 3,960 4,300

TCQ 800

Even though the inventory total cost curve is fairly flat around its minimum, when there are
quantity discounts, there are multiple U-shaped total inventory cost curves for each unit price
depending on the unit price. Therefore, when the quantity changes from 800 to 801, we shift to a
different total cost curve.
If we take advantage of the quantity discount and order 801 units, the total cost is computed as
follows:
D
Q
TC H S (P * D)
2
Q
801
3,600

$.40

$40 (3,600 x1.0)

801
2

160.2 179.77 3,600 $3,939.98

TCQ 801

The order quantity of 801 is preferred to order quantity of 800 because TC Q=801 < TCQ=800 or
3,939.98 < 4,300.

Instructors Manual, Chapter 13

227

Solutions (continued)

EOQ

2DS
2(3,600)(40)

848.53 boxes or 849

H
.40
D
Q
H S (P * D)

2
Q

TC EOQ

849
3,600

$.40

$40 (3,600 x1.0)

2
849

TC EOQ

TC EOQ 169.8 169.61 3,600 3,939.41

In fact, order size of 849 has a slightly lower total cost than 801 ($3,939.41 vs. $3,939.98).
18. Daily usage = 800 m/day Lead time = 6 days
Service level desired: 95 percent. Hence, risk should be 1.00 - .95 = .05
This requires a safety stock of 1,800 metres.
ROP = expected usage + safety stock
= 800 m/day x 6 days + 1,800 ft. = 6,600 m
19. expected demand during LT = 300 units
dLT = 30 units
a. Z = 2.33, ss = ZdLT
= 2.33 (30) = 69.9 => 70 units
b. smaller Z => less ss
20. LT demand = 600 kg.
dLT = 52 kg.
risk = 4% => Z = 1.75
a. ss = ZdLT = 1.75 (52) = 91 kg.
b. ROP = Average demand during lead time + safety stock
ROP = 600 + 91 = 691 kg.
21.

(
d
LT
SL

= 21 litres/wk.
= 3.5 litres/wk.
= 2 days
= 90 percent requires z = +1.28

a. ROP = ( (LT) + z

228

LT(d) = 21(2/7) + 1.28

90%
0

1.28

z-scale

8.39

litres

(2/7)(3.5) = 8.39 litres

Operations Management, 2/ce

Solutions (continued)
b. Q = ( (OI + LT) + Zd OI + LT - on hand = 21 7 + 2 + 1.28(3.5) 9/7 - 8 = 24.08 or
7 7
approx. 24 litres.
c. 1 day after
From a, ROP = 8.39
2 more days
on hand = ROP - 2 litres = 6.39 6.39 = 21 (2/7) + Z 2/7 (3.5)
solving, Z = .208 .21
P (stockout) = ?
which gives a risk of
1-.5832 = .4168 or about 42%
22.
d = 30 litres/day
ROP = 170 litres
LT = 4 days
ss = ROP - d(LT) = 170 - 30 (4) = 50
Risk = 9% => Z = 1.34 Solving ss = Z dLT = 50, dLT = 37.31
3% => Z = 1.88 x 37.31 = 70.15 litres
23.

d
ROP
LT
LT

ROP = d x ( + Z d LT
625 = 85 x 6 + Z (85) (1.1)
Z = 1.23 => 100 - 89.07 = 10.93%
. approx. 11%

= 85 boards/day
= 625 boards
= 6 days
= 1.1 day

SL 96% => Z = 1.75

( = 12 units/day
(= 4 days
d = 2 units/day
LT = 1 day

24.

ROP = ((+ Z (d 2 + (2LT 2

= 12 (4) + 1.75 4 (4) + 144 (1)
= 48 + 1.75 (12.65)
= 48 + 22.14
= 70.14 or 70 units

25. LT = 3 days
S = $10
D = 4,500 litres H = $.50/litre/year
360 days/yr.
(=
4,500
= 17.5/day
360
d = 2 litres
a.

Qty.
1 - 399
400 - 799
800+

Unit Price
$2.00
1.70
1.60

Qo =

2DS
=
H

2(4500)(10)
= 424.3 or 424
$0.50

TC = Q/2 H + (D/Q) S + PD
424
4500
TC 424
(.5)
($10) (1.70)(4500) 106 106.13 7650 $7,862.13
2
424
800
4500
TC800
(.5)
($10) (1.60)(4500) 200 56.25 7200 $7, 456.25
2
800
Q = 800 is optimal.
Risk = 1.5% Z = 2.17

Instructors Manual, Chapter 13

229

Solutions (continued)
b. ROP = (LT + Z

LT d

= 12.5 (3) + 2.17 3 (2)

= 37.5 + 7.517
= 45.017 litres or 45 litres
26.

d = 5 boxes/day
d = .5 boxes/day
LT = 2 days
S = $10
H = $10/box
a. D = 5 boxes/day x 250 days/yr. = 1250 boxes/yr.
2DS
2(1250)(10)
Qo =
=
= 50 boxes
H
10
b. ROP = 12 boxes ROP = ((LT) + z LT(d)
z=

ROP - ( (LT)

12 - 5(2)
2(.5)

= 2.83

LT (d)
Area under curve to left is .9977, so risk of stockout = 1.0000 - .9977 = .0023
Qo = ( (OI + LT) + zd OI + LT - on hand
Thus,
36 = 5(7 + 2) + z(.5) 7 + 2 - 12.
Solving for z yields z = +2.00 which implies a risk = 1.000 - .9772 = .0228.
27.

( = 80 kg
d = 10 kg
( = 8 days
LT = 1 day
a. SL = 90 percent, so z = +1.28 ROP = ((() + z

(2d + (22LT

= 80 (8) + 1.28 8(10)2 + 802(1)2 = 640 + 1.28 (84.85)

= 748.61 [round to 749]
b. E(n) = E(z) dLT = .048(84.85) = 4.073 units (kg) where E(z) = .048 from Table 13-3
28.

D = 10 rolls/day x 360 days/yr. = 3,600 rolls/yr.

( = 10 rolls/day
LT = 3 days
H = $.40/roll per yr.
d = 2 rolls/day
S = $5
a.
2DS
2(3,600)5
Q0 =
=
= 300 rolls
H
.40
b. SL of 96 percent requires z = +1.75
ROP = ((LT) + z LT(d) = 10(3) + 1.75 (3)(2) = 36.06 [round to 36]

230

Operations Management, 2/ce

Solutions (continued)
c. E(n) = E(z) dLT =.016 3(2) = .0554/cycle where E(z) = .016 from Table 13-3
D
3600
E(N) = E(n)
= .0554
= .665 rolls/year
Q
300
d. SLannual 1

E(N)
.665
1
.9998
D
3600

29. a. D = 1,200 cases

SLannual = 99%

S = $20

b. SS = ?
Expected dLT = 80, dLT = 5

H = $3 per case/year
E(z) dLT
SLannual = 1 Q
.99 = 1 - E(z) 5
127
Solving, E(z) = 0.254
From Table 13-3, Z = 0.32

ss = ZdLT
= .32 (5) = 1.6 cases
c. 1 - .6255 = .3745
30. (= 250 litres/day H = $0.3/litre/year D = 250 litres/day. x 250 days/yr. = 62,500 litres/yr.
d = 14 litres/day S = $20
2DS
2(62,500)10 = 2041.2
LT = 1 day
a. Qo =
=
H
.3
b. (i)

SLannual = 99.5%
dLT = LT d
= .1 (14)
= 14

SLannual = 1 -

E (z) dLT

Q
E (z) (14)
.005 =
2041.2
E(z) = .729 z = -.54 from Table 13-3
SL = .4840

SS = z dLT = -.54(14) = -7.56

b.(ii) E(n) = E(z) dLT

5 = E(z) (14)
E(z) = .357 z = -.08
31. FOI
SL = .98

SS = zdLT
SS = .08 (14) = 1.12 litres
Q = ( (OI + LT) + zd OI + LT - on hand
= ( (16) + 2.55d 16 - on hand

OI = 14 days

QK033

960 + 2.055(5) 16 - 420 = 581.1 581

LT = 2 days

QK144

800 + 2.055(4) 16 - 375 = 457.88 458

QL700

128 + 2.055 (2)

Instructors Manual, Chapter 13

16 - 160 = -15.56 -16 (Do not order)

231

Solutions (continued)
32. 50 wk./yr.
P34
D = 3,000 units

P35
D = 3,500 units
OI = 4 weeks
( = 70 units/wk.
d = 5 units/wk.
LT = 2 wk.
unit
p = $20
H = (.30)(20) = $6.00
S = $30
Risk = 2.5%

( = 60 units/wk.
d = 4 units/wk.
LT = 2 wk.
unit
p = $15
H = (.30)(15) = $4.50
S = $70
Stockout Risk = 2.5%
a. ROPP34 = (x LT+ z LTd
ROPP34 = 60(2) + 1.96 2 (4) = 131.1

c. Q = (OI + LT) ( + z OI + LT d - on hand

b. QP34 =

2(3,000)70
4.50

= 305.5
306
units

QP35 = 70 (4 + 2) + 1.96

4 + 2 (5) - 110

QP35 = 420 + 24 - 110

QP35 = 334 units
33.

Embedded Excel Worksheet

a.

232

Item
H4-010
H5-201
P6-400
P6-401
P7-100
P9-103
TS-300
TS-400
TS-041
V1-001

Estimated
Annual
Demand *
Demand Unit Price Unit price
20,000
$2.50
$50,000
60,200
$4.00 $240,800
9,800
$28.50 $279,300
16,300
$12.00 $195,600
6,250
$9.00
$56,250
4,500
$22.00
$99,000
21,000
$45.00 $945,000
45,000
$40.00 $1,800,000
800
$20.00
$16,000
26,100
$4.00 $104,400

Item
TS-400
TS-300

Estimated
Annual
Demand *
Demand Unit Price Unit price
45,000
$40.00 $1,800,000
21,000
$45.00 $945,000

Cumul
% of cumul
Demand * Demand *
% of no.
unit price unit price
of items
$1,800,000
48%
10%
$2,745,000
72%
20%

P6-400
H5-201
P6-401

9,800
60,200
16,300

$28.50
$4.00
$12.00

$279,300 $3,024,300
$240,800 $3,265,100
$195,600 $3,460,700

V1-001
P9-103
P7-100
H4-010
TS-041

26,100
4,500
6,250
20,000
800

$4.00
$22.00
$9.00
$2.50
$20.00

$104,400
$99,000
$56,250
$50,000
$16,000

$3,565,100
$3,664,100
$3,720,350
$3,770,350
$3,786,350

class
A
A

80%
86%
91%

30%
40%
50%

B
B
B

94%
97%
98%
100%
100%

60%
70%
80%
90%
100%

C
C
C
C
C

Operations Management, 2/ce

Solutions (continued)
b.
Item
H4-010
H5-201
P6-400
P6-401
P7-100
P9-103
TS-300
TS-400
TS-041
V1-001
34.

Estimated annual
demand
20,000
60,200
9,800
16,300
6,250
4,500
21,000
45,000
800
26,100

Ordering cost
50
60
80
50
50
50
40
40
40
25

Unit holding cost =

holding cost % *
unit price ($)
.50
.80
8.55
3.60
2.70
8.80
11.25
10.00
5.00
1.40

EOQ
2,000
3,005
428.2
672.9
481.1
226.1
386.4
600
113.1
965.5

Cost = $3.20 per dozen

Rev = $4.80 per dozen
Salvage = 4.80/2 = $2.40 per dozen

Cs = Rev - Cost = $4.80 - $3.20 = $1.60

Ce = Cost - Salvage = $3.20 - $2.40 = $.80
Cs
$1.60
1.6
SL =
=
=
= .67
Cs + Ce
$1.60 + $.80
2.4
Since this falls between the cumulative
probabilities of .63(x = 24) and .73(x = 25),
this means Don should make 25 dozen doughnuts.
The resulting service level = 73%

Instructors Manual, Chapter 13

.4545
-.11 0
78.9 80

x
Demand
19
20
21
22
23
24
25
26
27
.
.
.

z-scale
doz. doughnuts

P(x)
.01
.05
.12
.18
.13
.14
.10
.11
.10
.
.
.

Cum.
P(x)
.01
.06
.18
.36
.49
.63
.73
.84
.94
.
.
.

233

Solutions (continued)
35. Cs = $8,000 per unit
Ce = $100 + 1.45($100) = $245
Cs
$8,000 per unit
a. SL =
=
= .97
Cs + Ce
$8,000 + $245

[From Poisson Table with = 3.2]

x
Cum. Prob.
0
.041
1
.171
2
.380
3
.603
4
.781
5
.895
6
.955
7
.983
8
.994
9
.998
.
.
.
.
.
.

Using the Poisson probabilities, the minimum

stocking level that will provide the desired service
is seven spares (cumulative probability = .983).

b.

SL

Cs
Cs C e

.895

CS
CS 245

.895 CS 219.275 CS
.955

Cs
Cs 245

.105CS 219.275

.955(Cs 245) Cs

CS $2,088.33

.045Cs 233.975
Cs $5,199.44
Carrying six spare parts is the best strategy if the shortage cost is greater than $2089 and less than
$5199.
36. Cost = $4.20/kg
Normal demand
Rev = $5.70/kg
(= 80 kg./day
Salvage = $2.40/kg
d = 10 kg./day
Cs = Rev - Cost = $5.70 - $4.20 = $1.50/kg
Ce = Cost - Salvage = $4.20 - $2.40 = $1.80/kg
$1.50
Cs
$1.50
SL =
=
=
= .4545
$3.30
Cs + Ce
$1.50 + $1.80
The corresponding z = -.115 from Appendix B, Table B.
So = (- z d = 80 - .115(10) = 78.85 kg

234

Operations Management, 2/ce

Solutions (continued)
37. (= 40 litres/day
d = 6 litres/day
Ce = $.35/litre
Cs = ?
S = 49 litres
a. A stocking level of 49 litres translates into a z of + 1.5:
S-(
49 - 40
=
= 1.5
d
6
This implies a service level of .9332:
z=

.9332
0

1.5

z-scale

40

49

quarts

Cs
Cs
Thus, .9332 =
Cs + Ce
Cs + $.35
Solving for Cs we find: .9332(Cs + .35) = Cs; .0668 Cs = .32662; Cs = $4.89/litre
SL =

b. Customers may buy other items along with the strawberries (ice cream, whipped cream, etc.) that
they wouldnt buy without the berries.
38. Cs = Rev - Cost = $12 - $9 = $3.00/cake
Ce = Cost - Salvage = $9 - $7 = $2/cake
Demand is Poisson with mean of 6
Cs
$3.00
SL =
=
= .6
Cs + Ce
$3.00 + $2
Since .6 falls between the cumulative
probability for demand of 5 and 6, the
optimum stocking level is 6 cakes.

Instructors Manual, Chapter 13

[From Poisson Table with = 6.0]

Demand Cum. Prob.
0
.003
1
.017
2
.062
3
.151
4
.285
.40
5
.446
6
.606
.
.
.
.
.
.

235

Solutions (continued)
39. Cs = $2/burger x 8 burgers/kg = $16/kg
Ce = Cost - Salvage = $3.00 - $2.00 = $1/kg
Cs
$16
SL =
=
= .94
Cs + Ce
$16 + $1
The appropriate z is +.1.55 (App. B, Table B)
So = + z = 400 + 1.55(50) = 477.5 kg
40. Cs = $10/machine
Ce = ?
S = 4 machines

.94
0 1.55 z-scale
400 477.5
kg

Demand Freq.
0
.30
1
.20
2
.20
3
.15
4
.10
5
.05
1.00

Cum.
Freq.
.30
.50
.70
.85
.95
1.00

$10
.95.
$10 + Ce
Setting the ratio equal to .85 and solving for Ce yields $1.76, which is the upper end of the range.
Setting the ratio equal to .95 and again solving for Ce , we find Ce = $.53, which is the lower end of
the range.
b. The number of machines should be decreased: the higher excess costs are, the lower SL becomes,
and hence, the lower the optimum stocking level.
a. For four machines to be optimal, the SL ratio must be .85

41.
# of spares
0
1
2
3

Probability of Demand
0.10
0.50
0.25
0.15

Cumulative Probability
0.10
0.60
0.85
1.00

Cs = Cost of stockout = ($500 per day) (2 days) = $1000

Ce = Cost of excess inventory = Unit cost - Salvage Value = $200 - $50 = $150
SL

Cs
1,000

.87
Cs Ce 1,000 150

Since 87% is between cumulative probabilities of 85% and 100%, we need to order 3 spares.
42.

Demand and the probabilities for the cases of wedding cakes are given in the following table:
Demand
0
1
2
3

236

Probability of Demand
0.15
0.35
0.30
0.20

Cumulative Probability
0.15
0.50
0.80
1.00

Operations Management, 2/ce

Solutions (continued)
Cs = Cost of stockout = Selling Price - Unit Cost = $60 - $33 = $27
Ce = Cost of excess inventory = Unit Cost - Salvage Value = $33 -

SL

1
1
($60) = $23
2
3

Cs
27

.54
C s Ce 27 23

Since the service level of 54% falls between cumulative probabilities of 50% and 80%, the
supermarket should stock 2 wedding cakes.
43. a. D = 210*12 = 2,520 vaccines
Price p = $16 per vaccine
Carrying cost rate i = 8+8 = 16%
S = .5 hour * $17 / hr = $8.5
2DS
2( 2520)(8.5)

129.4, round to 130 vaccines or 13 lots of 10

EOQ =
ip
(.16)(16)
b. LT = 2 days
d=7
d = 2
Service level = 98%
z = 2.055 from App. B. Table B
ROP = d. LT + z d LT
= 7(2) + 2.055(2)( 2 ) = 14 + 5.8 = 19.8 round up to 20
vaccines or 2 lots of 10.
c. i.

ii.

Service level = 90%

z = 1.28 from App. B. Table B
Order up-to-level point = d. (OI+LT) + z d OI LT
= 7(14+2) + 1.28(2)( 14 2 ) = 112 + 10.24 = 122.24, round to 122 vaccines.
Order quantity = Order up-to-level point on hand = 122 34 = 88 vaccines, or approx.
9 lots of 10.

Case: UPD Manufacturing

S = $32, d = 89/week, h = $.08/unit/week, LT = 5 days
Students must recognize that without demand variability, the fixed order interval order quantity equation
reduces to:
Q = d(LT + OI) - on hand (because there is no safety stock)
Since on hand = d x LT, the fixed order interval order quantity equation Q further reduces to the
following:
Q = d x OI = (6) (89) = 534 units
Therefore, ordering at six-week intervals requires an order quantity of 534 units.

Instructors Manual, Chapter 13

237

On the other hand, the optimal order quantity is determined by using the basic EOQ equation.
Q

2dS

2(89)(32)
267
.08

Note that this is 3 weeks' worth of supply.

The weekly total cost based on optimal order quantity EOQ is given below:

d
Q
89
267
S
TC EOQ
H
32
.08
2
267
2
Q
TC EOQ 10.67 10.68 21.35 / week
The weekly total cost based on six-week fixed order interval (FOI) order quantity is given below:

d
Q
89
534
TC FOI S H
32
.08
2
534
2
Q
TC FOI 5.33 21.36 26.69 / week
Weekly savings of using EOQ (.e., ordering every 3 weeks) rather than 6-week FOI is 26.69 - 21.35 = $5.34
The annual savings = (52 weeks) ($5.34 /week) = $277.68
The total annual savings as a result of switching from six-week FOI to three-week FOI (or ordering 267
units at a time) would save UPD approximately $277.68).

Reading: Mark's Work Wearhouse

1. Inforem helps to tailor inventories to local demand. It keeps track of each merchandise in each
store separately and forecasts future needs (including seasonality) and suggests replenishment.
The database it keeps is also used to compare stores.
2. Annual service level, e.g. 75% annual service level, means 75% of all demand is met from the
stocks on the shelves, or store can be out of stock one out of 4 weeks.

238

Operations Management, 2/ce

Operations Tour: Great Canadian Bagel

Answers to Questions:
1.
Fixed order interval because demand is fairly stable and inventory is not perpetually
tracked.
2.
of.

Single period model, because any bagel left at the end of the day is donated or disposed

3.
Cost = $.15/bagel
Price = $.75/bagel
.75
.75
SL

.83
.75 .15 .90
4.

CS = $.75
Ce = $.15

Advantages of centralized mixing and forming facility:

- Reduced investment and operating costs

Disadvantages:
- Increased transportation cost
- Need to carry inventory, which may not be fresh when used
- Need for increased communication and coordination

Instructors Manual, Chapter 13

239