MME40001 Engineering Management 2 Topic: Operations Management

Tutorial 11: Inventory management and MRP Chapter- 12 & 14

Problem 1: Southeastern Bell stocks a certain switch connector at its central warehouse for supplying field
service offices. The yearly demand for these connectors is 15,000 units. Southeastern estimates its annual
holding cost for this item to be $25 per unit. The cost to place and process an order from the supplier is $75.
The company operates 300 days per year, and the lead time to receive an order from the supplier is 2
working days.
a) Find the economic order quantity.
b) Find the annual holding costs.
c) Find the annual ordering costs.
d) What is the reorder point?

Problem 2: Joe Henry’s machine shop uses 2,500 brackets during the course of a year. These brackets are
purchased from a supplier 90 miles away. The following information is known about the brackets:
Annual demand: 2,500
Holding cost per bracket per year: $1.50
Order cost per order: $18.75
Lead time: 2 days
Working days per year: 250

a) Given the above information, what would be the economic order quantity (EOQ)?
b) Given the EOQ, what would be the average inventory? What would be the annual inventory
holding cost?
c) Given the EOQ, how many orders should be made each year? What would be the annual order
cost?
d) Given the EOQ, what is the total annual cost of managing the inventory?
e) What is the time between orders?
f) What is the reorder point (ROP)?

Problem 3: Arther Meiners is the production manager of Wheel-Rite, a small producer of metal parts.
Wheel-Rite supplies to Cal-Tex, a larger assembly company, with 10,000 wheel bearings each year. This
order has been stable for some time. Setup cost for Wheel-Rite is $40, and holding cost is $0.60 per wheel
bearing per year. Wheel-Rite can produce 500 wheel bearings per day. Cal-Tex is a just-in-time
manufacturer and requires that 50 bearings be shipped to it each business day.
(a) What is the optimal production order quantity?
(b) What is the maximum number of wheel bearings that will be in inventory?
(c) How many production runs of wheel bearings will Wheel-Rite have in a year?
(d) What is the total setup + holding cost for Wheel-Rite?

Problem 4: The annual demand for item A is 40,000 units. The ordering cost for each order is $40 and the
annual inventory holding cost is $3 per item per year. Given the following price breaks for purchasing the
item, answer the questions below:-

Abstracted from Heizer, J., and Render, B,. Operations Management, 8e, 2006. Pearson. 1
 Range Quantity Price
1 1-1,499 $2.50 per unit
2 1,500 or more $2.40 per unit

a) Calculate optimal order quantity Q*.

b) The company manager would like to know if the company could take advantage of the discounts given
by the supplier. Hence, calculate the annual setup cost, annual holding cost and total cost for each range
of price. Organize your answer in the table provided.
c) What are the best quantity and price to be ordered each time?

Range 1 Range 2
Order Quantity
Annual holding cost
Annual setup cost
Annual product cost
Total

Problem 5: Emery Pharmaceutical uses an unstable chemical compound that must be kept in an
environment where both temperature and humidity can be controlled. Emery uses 800 pounds per month of
the chemical, estimates the holding cost to be 50% of the purchase price (because of spoilage), and
estimates order costs to be $50 per order. The cost schedules of two suppliers are as follows:
Vendor 1 Vendor 2
Quantity Price / lb Quantity Price / lb
1-499 $17.00 1-399 $17.10
500-999 16.75 400-799 16.85
1,000+ 16.50 800-1,199 16.60
1,200+ 16.25
(a) What is the economic order quantity for each supplier?
(b) What quantity should be ordered, and which supplier should be used?
(c) What is the cost for the most economic order size?
(d) What factor(s) should be considered besides total cost?

Problem 6: Authentic Thai rattan chairs are delivered to Gary Schwartz’s chain of retail stores, called The
Kathmandu Shop, once a year. The reorder point, without safety stock, is 200 chairs. Carrying cost is $30
per unit per year, and the cost of a stockout if $70 per chair per year. Given the following demand
probabilities during lead time, how much safety stock should be carried?
Demand during lead time Probability
(kilos)
0 0.2
100 0.2
200 0.2
300 0.2
400 0.2

Abstracted from Heizer, J., and Render, B,. Operations Management, 8e, 2006. Pearson. 2
Problem 7: Heather Adams, production manager for a Colorado exercise equipment manufacturer, needs to
schedule an order for 50 UltimaSteppers, which are to be shipped in week 8. Subscripts indicate quantity
required for each parent. Assume lot-for-lot ordering. Below is information about the steppers:
Item Lead On-hand Components
time Inventory
Stepper 2 20 A(1), B(3), C(2)
A 1 10 D(1), F(2),
B 2 30 E(1), F(3),
C 3 10 D(2), E(3),
D 1 15
E 2 5
F 2 20

a) Develop a product structure for Heather.

b) Develop a time-phased product structure
c) Develop a gross material requirements plan
d) Develop a net material requirement plan

Problem 8: The Hunicut and Hallock Corporation makes two versions of the same basic file cabinet, the
TOL (Top-of-the-line) five drawer file cabinet and the HQ (High-quality) five drawer filing cabinet.
The TOL and HQ use the same cabinet frame and locking mechanism. The drawer assemblies are different
although both use the same drawer frame assembly. The drawer assemblies for the TOL cabinet use a
sliding assembly that requires four bearings per side whereas the HQ sliding assembly requires only two
bearings per side. (These bearings are identical for both cabinet types.) 100 TOL and 300 HQ file cabinets
need to be assembled in week #10. No current stock exists.
a) Develop a material structure tree for the TOL and the HQ file cabinets.
b) Develop a gross material requirements plan for the TOL and HQ cabinets
c) Develop a net material requirements plan for the TOL and HQ file cabinets assuming a current on-
hand finished goods inventory of 100 TOL cabinets. The lead times are given below.
Painting and final assembly of both HQ and TOL requires 2 weeks.
Both cabinet frames and lock assembly require 1 week for manufacturing.
Both drawer assemblies require 2 weeks for assembly.
Both sliding assemblies require 2 weeks for manufacturing.
Bearings require 2 week to arrive from the supplier.

Problem 9: The product structure (not using low-

Alpha
level coding) for an assembly product Alpha is given.
The quantities of each component needed for each
assembly are noted in parenthesis. B (1) C (1)
a) Determine the low-level coding
b) Determine the quantity of each component D (2) C (2) E (1) F (1)
necessary to produce 10 units of Alpha.

Abstracted from Heizer, J., and Render, B,. Operations Management, 8e, 2006. Pearson. 3
 c) Develop a time-phased product structure and material requirement plan (net MRP) for Alphas given
the following lead times, quantity on hand, and master production schedule.
Item Lead Quantity
Time on Hand
Alpha 1 10
B 2 20
C 3 0
D 1 100
E 1 10
F 1 50
Master Production Schedule for Alpha
Period 6 7 8 9 10 11 12 13
Gross requirements 50 50 100

Abstracted from Heizer, J., and Render, B,. Operations Management, 8e, 2006. Pearson. 4