MSc in Business Administration

Academic Year of 2022-2023

Logistics and Supply Chain Management

Independent Materials Management

Exercise Booklet

Prepared by João Vilas-Boas, on behalf of the Course Team

Exercise 1

a) Determine the Annual Average Stock for each one of the four situations depicted below.

b) Calculate the Anual Carrying Cost for each one of the situations.

Consider the Unit Holding Cost is 5€/un/year.

Exercise 2

Consider the situation of a reference where the Average Stock is 4000 unit/year for an Annual
Demand of 8000 unit/year and a Stock Turnover of 1 turn/year. Consider the company you are
advising is using its own truck to transport this SKU and also for the incoming logistics of the
remaining 100 SKUs. This is an import company of which business is a buying-storing-selling one.

a) Depict this situation graphically.

b) Consider that the Managing Director is considering a change to a new situation where the
Average Stock is 500 unit/year for the same Annual Demand and a Stock Turnover of 8 turn/year.
Depict this new situation graphically.

c) Present your cost and operational arguments for and against the new situation. Which actions
would you recommend to assess its interest?

Exercise 3

A fresh Graduate is taking over an Internship as

a Materials Manager. On the first day, the
Department Boss came and said: “I need to
calculate the Annual Average Stock for the SKU
XPT101. Can you please help me?”

a) Determine your best guess for the Annual

Average Stock of the SKU XPT101 of which
behaviour pattern is depicted in the graphic.

b) Explain in a summarised way (2 or 3 lines)

the assumptions you made in your estimation.
How could you get a better estimate?

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Exercise 4

Consider a buying-storing-selling operation of an SKU item described as a “case”. The Sales of the
case are ten cases per week and the Delivery Lead Time is two weeks. Both Sales and Delivery Lead
Time behave as deterministic variables. So, any statistical variation around an average value is
excluded for both of them.

a) The Purchasing Department was asking when should they order the “case” if a “perfect”
materials management model was applied. They think that for cost reasons they should order a
fixed quantity each time.

Moreover, each case costs 80 Euros to buy and the ordering costs are 12 Euros per order, which
includes paperwork, clerical worker time, transportation, and insurance among others. The company
decided to “calculate” the annual carrying cost by multiplying the annual average stock by the unit
carrying cost. In addition, the unit holding cost was estimated by applying a 30% per year average
carrying rate of the sector to the unit purchasing cost.

b) The buyers were also asking how much they should order each time an order was launched and
what was the criterion for determining that amount because they were hearing from the
computer people about different rules to find it. So, they were confused. Can you help them?

However, a few of the Logistics people were arguing that ordering the Economic Order Quantity did
not make any sense because it was constraining the formation of the load unit (palets) and making it
more difficult to “optimise” the truck loads at no evident benefit. Furthermore, Marketing people
could not be happier about getting rid of these limits because they were increasing their degree of
freedom to deal with a broader range of packaging options.

c) Do you support these Logistics claims and Marketing expectations? Why?

The Managing Director was very interested to know the number of orders per year as well as the
time between orders. She was also interested in understanding if these two figures are precise and
regular or variable. Finally, she was wondering about what would be the Annual Total Cost of the
Materials Management Policy.

d) Could you please calculate the number of orders per year as well as the time between orders
and comment on their precision and regularity?

e) Calculate the Annual Total Cost and provide some advice on the way to improve it by
considering the above scenario for the variation of the total cost with the economic ordering
quantity.

Exercise 51

Natura is a store of natural products. It is open from Monday to Sunday, 52 weeks a year. From the
several products available at the store it is possible to identify Calcium and Iron.

Calcium, due to supplier constraints, can only be ordered once a week, on Saturday. The number of
units is identified after the store is closed. The supplier guarantees delivery on the following Monday
before the store is opened.

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Exercise from the Operations Management Group set of exercises

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For the second product, a Q model is used. This product is purchased from a different supplier and it
guarantees a lead time of 2 days.

Today is Saturday and the store has just closed. The inventory is of 98 units of Calcium and 109 units
of Iron. There are no orders of Iron in transit.

The following data is known for the next weeks concerning the two products:

Issuing a new order costs 2€, whatever the supplier. A service level of 99% (z=3) is desired.

a) Determine if there is a need to order any of the products right now and, if so, the quantity that
should be ordered. Justify your answer.

b) The Logistics Director is worried and states that “the inventory policy for Calcium has been
generating excessive average inventories”. After negotiation with the supplier, it made the
following proposal to the Logistics Director:

“Change the inventory policy to a continuous revision model, increasing the lead time to 3 days
and the purchasing cost by 5%.”

What decision should the Logistics Director make? Justify your answer.

Exercise 62

Russel, Lda (RSS) imports sweets. Drops are supplied from Spain by BARCINO, a company located in
Barcelona. Both RSS and BARCINO work 52 weeks a year.

RSS has its warehouse in Carregado. From this warehouse, it supplies its 4 retail stores.

RSS receives daily orders from the stores from Monday to Saturday. Stores are open from Monday
to Saturday, from 10:00 to 22:00. The warehouse supplies one day after the order, 6 days a week.

BARCINO supplies every Tuesday before 10:00 at the central warehouse, according to the orders
placed on Friday until 10:00.

Note that the warehouse works 6 days a week, from Monday to Saturday.

Daily demand from each store, and daily standard deviation in demand, in boxes, are as

follows (demand (standard deviation)):

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Exercise from the Operations Management Group set of exercises

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Note: RSS places orders in boxes, is supplied in boxes and delivers in boxes

Data:

a) Today is Friday and it is 9:00. RSS Logistics Director asks you to identify how many boxes should
be ordered.

b) Knowing in advance that BARCINO is willing to change the time between orders and keep lead
time, the Director of RSS is not satisfied with the average inventory level of drops. As the
considers that they are too high, he made the following proposal:

“Without changing the inventory model, I think we should change our time between orders (TBO)
to become closer to the economic time between orders (TBO*). I think that this would decrease
the average level of inventory of drops”.

Comment on this statement and justify your position.

Exercise 73

The “Sofa Store” is a retail unit specialized in sofas. Its “Extra Comfort” model has an average daily
demand of 10 units, with a standard deviation of 2 units per day.

The retail store is negotiating with its supplier new supply conditions:

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Exercise from the Operations Management Group set of exercises

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Consider that the store is opened 360 days per year.

Will there be any savings in total annual costs if the change occurs?

Exercise 8

The following table introduces a data sample of stocked items.

Item Annual Unit Cost

reference usage (units) (€)
A1630 2200 150
N3184 400 85
D2541 510 617
L8910 1000 158
A1687 425 345
L5540 600 38
N1111 100 180
A5322 1400 212
B2173 4500 265
A0521 750 38
D8211 60 130
L5186 14000 55
N0042 6210 378
A4518 90 53
F3087 50 1020
B8925 240 200
C9000 120 485
B6134 900 615
A4815 1200 90
L2664 660 70
D5592 8400 159
A3333 700 485
F6991 80 100
G1414 70 35
C2663 150 45

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a) Please, execute a Pareto Analysis with this sample. Determine the A, B & C classes. Please
comment on the results.

b) Depict the results graphically