Full Name: Vũ Thị Hoàng Diệu

ID: 20198064

INDIVIDUAL ASSIGNMENT 8

CHAPTER 12: INVENTORY MANAGEMENT

3. What is the purpose of the ABC classification system?
ABC analysis divides inventory into three classes based on annual dollar volume
o Class A - high annual dollar volume
o Class B – medium annual dollar volume
o Class C – low annual dollar volume
ABC analysis used to establish policies that focus on the few critical parts and not the
many trivial ones.
7. Explain why it is not necessary to include product cost (price or price times quantity) in
the EOQ model, but the quantity discount model requires this information.
Economic order quantity (EOQ) model, an inventory-control technique that
minimizes that total of ordering and holding costs. Order quantity = Q is the main factor
which is used to know the inventory level so that price or price times quantity don’t need in
the EOQ model.
The quantity discount model requires this price because A quantity discount is simply
a reduced price (P) for an item when it is purchased in larger quantities. As with other
inventory models, the objective is to minimize total cost. Placing an order for that quantity,
however, even with the greatest discount price, may not minimize total inventory cost. This is
because holding cost increases. Thus, the major trade-off when considering quantity
discounts is between reduced product cost and increased holding cost.
D Q
TC = S + IP + PD
Q 2
10. When quantity discounts are offered, why is it not necessary to check discount points that
are below the EOQ or points above the EOQ that are not discount points?
When quantity discounts are offered, it is not necessary to check discount points that below to
EOQ because these points have higher inventory costs than EOQ although the price is lower
than quantity points.
Points above the EOQ that are not discount points because it has inventory costs than EOQ
(In some cases, points above EOQ don’t exist, so ‘points above the EOQ that are not discount
points’ is not right for all cases).
16. When demand is not constant, the reorder point is a function of what four parameters?
The reorder point is a function of what four parameters:
ROP=( Average daily demand × Lead time ∈days )+ Ζ σ dLT
 Where σ dLT = Standard deviation of demand during lead time = σ d √ Lead time
σ d= Standard deviation of demand per day

Four parameters: Average daily demand; Lead time; Standard deviation of daily demand;
Service level
17. How are inventory levels monitored in retail stores?
Inventory levels monitored in retail stores include the following:
- Good personnel selection, training and discipline: These are never easy but very necessary
in food-service, wholesale and retail operations where employees have access to directly
consumable merchandise.
- Tight control of incoming shipments: This task is being addressed by many firms through
the use of Universal Product Code (or bar code) and radio frequency ID (RFID) systems that
read every incoming shipment and automatically check tallies againts purchase orders. When
properly designed, these systems – where each stock keeping unit (SKU; pronounced ‘skew’)
has its own identifier – can be very hard to defeat.
- Effective control of all goods leaving the facility: This job is accomplished with bar codes,
RFID tags, or magnetic strips on merchandise and via direct observation. Direct observation
can be personnel stationed at exits and in potentially high-loss areas or can take the form of
one-way mirrors and video surveillance (giám sát) .
12.27 Chris Sandvig Irrigation, Inc., has summarized the price list from four potential
suppliers of an underground control valve. See the accompanying table. Annual usage is
2,400 valves; order cost is $10 per order; and annual inventory holding costs are $3.33 per
unit. Which vendor should be selected and what order quantity is best if Sandvig Irrigation
wants to minimize total cost?

D = annual usage: 2,400 values

S = order cost: $10 per order
H = annual inventory holding costs: $3,33 per unit
 Solve:

Q¿ =
√ 2 DS
H
=
√2 ×2,400 × $ 10
$ 3.33
=120,06

Vendor A:
Annual Annual Annual Total annual
Quantity Price
ordering cost holding cost product cost cost
120 $33.55 200 199.80 80520 $80919.80
150 32.35 160 249.75 77640 78049.75
300 31.15 80 499.50 74760 75339.50
500 30.75 48 832.50 73800 74680.50

Vendor B:
Annual Annual Annual Total annual
Quantity Price
ordering cost holding cost product cost cost
120 $34.00 200 199.8 81600 $81999.8
150 32.80 160 249.75 78720 79129.8
300 31.60 80 499.5 75840 76419.5
500 30.50 48 832.5 73200 74080.5

=> Vendor B is selected because the total annual cost for 500 valves is the lowest
($74080.5), 500 valves should be ordered.
Vendor C:
Annual Annual Annual Total annual
Quantity Price
ordering cost holding cost product cost cost
120 $33.75 200 199.8 81000 $81399.8
200 32.50 120 333 78000 78453
400 31.10 60 666 74640 75366

Vendor D:
Annual Annual Annual Total annual
Quantity Price
ordering cost holding cost product cost cost
120 $34.25 200 199.8 82200 $82599.8
200 33.00 120 333 79200 79653
400 31.00 60 666 74400 75126

12.49 A gourmet coffee shop in downtown San Francisco is open 200 days a year and sells an
average of 75 pounds of Kona coffee beans a day. (Demand can be assumed to be distributed
normally, with a standard deviation of 15 pounds per day.) After ordering (fixed cost = $16
per order), beans are always shipped from Hawaii within exactly 4 days. Per-pound annual
holding costs for the beans are $3.

Open 200 days, sells an average of 75 pounds a day => D = 200 × 75 = 15,000
σ = A standard deviation: 15 pounds/day
S = Fixed cost: $16/order
H = Annual holding costs: $3
Solve:

a) What is the economic order quantity (EOQ) for Kona coffee beans?
¿
Q=
√ 2 DS
H
=
√ 2 ×15,000 × $ 16
$3
=400
b) What are the total annual holding costs of stock for Kona coffee beans?
Q 400
Total annual holding costs= × H= × $ 3=$ 600
2 2
c) What are the total annual ordering costs for Kona coffee beans?
D 15,000
Total annualordering costs= × S= × $ 16=$ 600
Q 400
d) Assume that management has specified that no more than a 1% risk during stockout is
acceptable. What should the reorder point (ROP) be?

Risk stock 1% (service level 99%) => Z = 2.326

ROP = d×<+ss
¿ 75 × 4+ Z σ dLT ¿ 75 × 4+2.326 × σ d √ Lead time ¿ 75 × 4+2.326 ×15 × √ 4
¿ 369.78

e) What is the safety stock needed to attain a 1% risk of stockout during lead time?
The safety stock needed to attain a 1% risk of stockout during lead time
ss=Z σ dLT ¿ 2.326 × σ d √ Lead time ¿ 2.326 ×15 × √ 4¿ 69.78

f ) What is the annual holding cost of maintaining the level of safety stock needed to support
a 1% risk?

The annual holding cost of maintaining the level of safety stock needed to support a 1% risk
= ss × H =69.78 × $ 3=$ 209.34
g) If management specified that a 2% risk of stockout during lead time would be acceptable,
would the safety stock holding costs decrease or increase?

Risk stock increases 2% => Z = 2.054

=> ss=2.054 ×15 × √ 4=61.62
The higher we make risk of stockout, The less ss we need.