 the quantity of inventory that a stage of the supply chain either produces  Which cost takes into account

account the return demanded on the firm's equity

or purchases at a given time is = a lot or batch. and the amount the firm must pay on its debt?= Cost of capital
 The average inventory in the supply chain due to either production or  Which cost should only include receiving and storage costs that vary
purchases in lot sizes that are larger than those demanded by the
with the quantity of product received?= Handling cost
customer is = cycle inventory.
 A graphical plot depicting the level of inventory over time is= an  Which cost should reflect the incremental change in space cost due to
inventory profile. changing cycle inventory?= Occupancy cost
 When demand is steady, cycle inventory and lot size are related as=  Which of these managerial levers should be used to reduce large lots
Cycle Inventory = Lot Size/2. associated with the fixed cost of production?= Reducing changeover
 Average flow time resulting from cycle inventory is equal to = Cycle times
Inventory/Demand = Q/2D.  Inventory carried for the purpose of satisfying demand that exceeds the
 Cycle inventory is primarily held to= take advantage of economies of
amount forecasted for a given period is= safety inventory.
scale and reduce cost within the supply chain.
 The primary role of cycle inventory is to allow different stages in the  Safety inventory is carried because= demand forecasts are uncertain.
supply chain to= purchase product in lot sizes that minimize the sum of  The trade-off that a supply chain manager must consider when planning
the material, ordering, and holding cost. safety inventory is= increasing product availability versus increasing
 Economies of scale in purchasing and ordering motivate a manager to= inventory holding costs.
increase the lot size and cycle inventory.  Safety inventory is carried because= demand forecasts are uncertain.
 The price paid per unit is referred to as= the material cost and is denoted
 The trade-off that a supply chain manager must consider when planning
by C
 The cost of carrying one unit in inventory for a specified period of time, safety inventory is= increasing product availability versus increasing
usually one year, is referred to as= the holding cost and is denoted by H. inventory holding costs.
 Ordering costs would include which of the following? = Transportation  The issue of product availability and the level of safety inventory is
cost particularly significant in industries where= product life cycles are short
 Inventory holding costs would include which of the following? = and demand is very volatile.
Obsolescence cost
 The fraction of replenishment cycles that end with all the customer
 Total ordering and holding costs= are relatively stable around the
economic order quantity. demand being met is the= cycle service level (CSL).
 If demand increases by a factor of k, the optimal lot size increases by a  A company that tracks inventory and places an order for a lot size Q
factor of= the square root of k. when the inventory declines to the reorder point (ROP) is using=
 Aggregating across products, retailers, or suppliers in a single order continuous review.
allows for= a reduction in lot size for individual products.  Lead time is the gap between= when an order is placed and when it is
 Aggregating across products, retailers, or suppliers in a single order received
allows for a reduction in lot size for individual products because= fixed
ordering and transportation costs are now spread across multiple  The coefficient of variation measures= the size of the uncertainty
products, retailers, or suppliers relative to demand.
 A key to reducing lot size without increasing costs is to= reduce the  As the safety inventory is increased,= both fill rate and cycle service
fixed cost associated with each lot. level increase.
 A price discount where the pricing schedule offers discounts based on  For the same safety inventory, an increase in lot size= increases the fill
the quantity ordered in a single lot is= lot size based. rate but not the cycle service level
 A price discount where the discount is based on the total quantity
 The required safety inventory= increases with an increase in the lead
purchased over a given period, regardless of the number of lots
purchased over that period, is= volume based. time and the standard deviation of periodic demand.
 Pricing schedules with all unit quantity discounts encourage retailers to=  What is an explanation offered for why firms have not historically
increase the size of their lots. tracked stockouts very well?= Stockouts are difficult to track
 In the pricing schedule for marginal unit quantity discounts= the  A goal of any supply chain manager is to= reduce the level of safety
marginal cost of a unit decreases at a breakpoint. inventory required in a way that does not adversely affect product
 Quantity discounts lead to= a significant buildup of cycle inventory in
availability.
the supply chain.
 Trade promotions lead to a significant ________ in lot size and cycle  As the uncertainty of supply or demand ________, the required level of
inventory because of forward buying by the ________.= increase; safety inventories ________.= grows; increases
retailer  The ________ is the average units of demand that are not satisfied from
 If decisions made at the retailer and supplier stage serve to maximize inventory in stock per replenishment cycle.= ESC
total supply chain profits, the supply chain is= coordinated.  Both ________ and ________ increase as the safety inventory is
 In a supply chain where each stage of the supply chain independently
increased = fill rate; cycle service level
makes its pricing decisions with the objective of maximizing its own
profit= supply chain profit is lower than a coordinated solution.  A shortage occurs in a replenishment cycle= only if the demand during
 In a supply chain for commodity products, in order to maximize supply the lead time exceeds the ROP.
chain surplus, the objective of supply chain members should be to=  A(n) ________ in supply uncertainty can help ________ safety
minimize costs. inventory required without hurting product availability= reduction;
 For products where the firm has market power, coordination in the reduce
supply chain can be achieved and supply chain profits maximized  ________ is the ability of a supply chain to delay product differentiation
through the use of= two-part tariffs or volume based quantity discounts.
 Discounts related to price discrimination will be= volume based. or customization until closer to the time the product is sold=
 The goal of trade promotions is to= influence retailers to act in a way Postponement
that helps the manufacturer achieve its objectives.  Which approach to aggregation requires an information system that
 The retailer can justify the forward buying when= it decreases his total allows access to current inventory records from each location=
cost. Information centralization
 Replenishment orders in multi-echelon supply chains should be=  The use of one product to satisfy demand for a different product is=
synchronized to keep cycle inventory and order costs low.
product substitution.
 Which approach to aggregation has the goal of moving product
 Periodic review policies for inventory replenishment require safety
 differentiation as close to the pull phase of the supply chain as possible? inventory to cover demand during= both lead time and the review
= Postponement interval
 Continuous review policies for inventory replenishment require safety  If demand rate (D) to production rate (P) equals 0.4 and the optimal
inventory to cover demand during= lead time only
production quantity equals 100 units, what is annual holding cost
 A continuous review policy dictates that= Q units are ordered when the
inventory drops to ROP assuming H=$1? Average inventory = 100/2(1-0.4) = 50 x 0.6 = 30
 Typically, in continuous review policies, the lot size to order= is kept units Average holding cost = Average inventory x H = 30 x 1 = $30
fixed between replenishment cycles.  If demand increases by 60%, EOQ increases by: 1sqrt 0.60 =1.6
 In a periodic review system, the order up to level= equals the current sqrt = 1.2649 Percentage increase = (1.2649 - 1) x 100% =
inventory level plus the lot size ordered.
26.49%
 Periodic review policies require= more safety inventory than continuous
review policies for the same level of product availability.  Profit is Qr=1000 units and the quantity that maximizes the supply
 All inventory between a given stage in the supply chain and the final chain's profit is Qsc=1200 units. If retailer's profit at Qr equals $2000
customer is called the= echelon inventory. and at Qsc equals $1800, how much discount per unit the supplier
 A distributor should decide his safety inventory levels based on= the should offer to the retailer to encourage the retailer to order Qsc,
level of safety inventory carried by all retailers supplied by him. assuming annual demand is 10000 units. Decrease in profit: 2000 –
 As retailers decrease the level of safety inventory they carry, the 1800 = $200 The discount per unit is: $200/10000 = 0.02 dollars = 2
distributor will have to= increase his or her safety inventory.
 Carrying more inventory upstream in a multi echelon supply chain= cents
reduces the amount of inventory required.  When order quantity equals EOQ, annual ordering cost is $1000. If
 A supply chain needs to achieve a balance between the level of annual holding cost per unit is $10, what id the average time an item
availability and the cost of inventory that= maximizes supply chain spends in the inventory, assuming annual demand is 1000 units?
profitability. 1000/10 =100, Average flow time= (Q/2)/D= 100/1000=0.1 year or
 The level of product availability, also referred to as the ________, is one 36.5 days, more than a month
of the primary measures of a supply chain's responsiveness= customer
 comodity product 10,000. When the retailer and manufacturer optimize
service level
 Whether the optimal level of product availability is high or low depends their costs independently, the optimal order quantity for retailer is 1,000
on where a particular company believes they can= maximize profits. units, resulting in a retailer inventory cost of $8,000. optimal order
 The margin lost by a firm for each lost sale because there is no quantity increases to 2,000 units. This coordination leads to a retailer
inventory on hand is= the cost of understocking the product. inventory cost of $8,500 but decreases supply chain costs. What is the
 The margin lost from current as well as future sales if the customer does minimum discount that the manufacturer should offer to the retailer to
not return should be included in= the cost of understocking the product.
incentivize the retailer to order the quantity that minimizes supply chain
 The costs of overstocking and understocking have a direct impact on=
both the optimal cycle service level and profitability. costs? The increase in inventory cost due to coordination is: $8,500 -
 As the ratio of the cost of overstocking to the cost of understocking gets $8,000 = $500 $500 / 10000 units = 0.05 dollars / unit = 5 cents / unit
smaller= the optimal level of product availability increases  A retailer faces a demand curve of D=200,000-40,000P. The normal
 An increase in forecast accuracy= decreases both the overstocked and price charged by the manufacturer to the retailer is Cr=$2 per bottle.
understocked quantity and increases a firm's profits. Ignoring all inventory-related costs, and assuming that retailer
 Supply chain managers are able to= increase their forecast accuracy as
maximizes its profit independently, evaluate the new optimal Xprice as
lead times decrease.
 Quick response is clearly advantageous to= a retailer in the supply a result of a manufacturer discount of $0.10 per unit. New cost to
chain. retailer: Cr = $2 – $0.10 = $1.90 Revenue = P x D = P x (200000 –
 Quick response results in= the manufacturer making a lower profit in the 40000P) Cost = Cr x D = 1.90 x (200000 – 40000P) Profit = (P –
short term if all else is unchanged. 1.90) x (200000 – 40000P) To find the price that maximizes profit,
 Which of these options would NOT increase profitability?= Decrease
take the derivative of the profit function with respect to P and set it
the number of orders per season.
 As the standard deviation of forecast error increases,= expected profit to zero. Differentiating and setting the derivative equal to zero:
decreases and expected understock increases. D/dP((P – 1.90)(200000 – 40000P)) = 0 200000 – 40000P –40000(P-
 As the number of order cycles per season increases,= the leftover
1.90) = 0 200000 – 80000P + 76000 = 0 , 276000 = 80000P , P=
inventory decreases, but at a decreasing marginal rate.
 As the total quantity for the season is broken up into multiple smaller 276000/80000 =3.45
orders, the buyer is better able to= match supply and demand and  Price for a new product is set by the retailer and the manufacturer's cost
increase profitability (Cm) is $2. If the retailer and manufacturer optimize their profits
 If quick response allows multiple orders in the season= profits increase independently, the manufacturer will charge the retailer (Cr) $3 per unit
and the overstock quantity decreases and the profits of manufacturer and retailer will be $15,000 and
 Postponement is valuable for a firm that= sells a large variety of
$10,000, respectively. If manufacturer and retailer coordinate their
products with demand that is independent and comparable in size.
 Postponement is= not very effective if a small fraction of demand comes decisions, the optimal retail price (p) will be $3 and demand will
from a single product. increase to 100,000 units. What is the maximum value of Cr, the
 A company with multiple products that chooses to delay product discounted retailer's cost, in the following all-unit quantity discount
differentiation until closer to the point of sale is using= postponement. scheme that will drive the retailer to set the coordinated price?Retailers
 Under tailored postponement, a firm produces the amount that is very profit = (P – Cr) x demand = (3 – Cr) x 100000 For the retailer’s
likely to sell using= the lower cost production method without
coordinated profit to be at least $10,000: (3 – Cr) x 100000 ≥
postponement and produces the portion of demand that is uncertain
using postponement. 10000 Solving for Cr: 3 – Cr = 10000/100000 = 0.10 Cr = 3 – 0.10 =
 The value of postponement decreases as= uncertainty decreases or 2.90
demand is positively correlated among end products.  The annual demand for a product is 450,000 units. The manufacturer
 The value of postponement decreases as= uncertainty decreases or currently charges $5 per bottle, and the retailer incurs an annual holding
demand is positively correlated among end products cost of 10 percent. Each time, the retailer orders 9,000 units. The
 ________ may reduce overall profits for a firm if a single product manufacturer has offered a discount of $0.10 on all units purchased by
contributes the majority of the demand= Postponement
 ________ allows a firm to increase profits and better match supply and retailers over the coming month. Assuming that the retailer would not
 demand if the firm produces a large variety of products whose demand pass the discount on to the customers, what would be the forward buy?
is unpredictable, not positively correlated, and is of about the same Q^d = dD / (c-d) h + CQ / C-d
size.= Postponement
 An electric car manufacturer uses a distinct battery for each of its 10 Qd= (0.1 x 450,000) / (5-0.1) 0.1) + 5 x 9000 / (5-0.1) = 101020
models. The monthly means and standard deviations of all models are Forward buy= 101020 - 9000 = 92020
the same, and equal to 1000 units and 100 units respectively. How much
safety stock is needed if the desired cycle service level is 95%, assuming
the lead time is one month. CSL = 0.95 -> Z = 1.645
= SQRT (1) x 100 = 100 -> SS = 1.645 (100) = 164.5 --Total SS for 10 average demand over lead time= average weekly demand x lead time=
models = 10 x 164.5 = 1645 500 x 2= 1000
 An electric car manufacturer uses a distinct battery for each of its 9 Safety stock= ROP- average demand over lead time= 1100-1000= 100
models. The monthly means and standard deviations of all models are Cycle inventory= Lot size/2= 125/2= 62.5
the same, and equal to 1000 units and 100 units respectively. The Total inventory= cycle inventory + safety stock= 100+62.5= 162.5
manufacturer is deciding to use the same battery in all 9 models, how What is the average flow time of a phone if the reorder point used by
much safety stock is needed if the desired cycle service level is 95%, Mr. Barksdale is 2000 phones? average flow time= average inventory
assuming the lead time is one month. CSL = 0.95 -> Z = 1.645 D = /demand
SQRT (9) x 100 = 300 L = SQRT (1) x 300 = 300 -> SS = 164.5 x average inventory= cycle inventory + safety stock
300 = 493.5 cycle inventory=lot size/2=125/2=62.5
 A manager replenishes an item every 5 weeks. The lead time is 4 weeks. safety stock=ROP - average deman over leadtime
If the mean and standard deviation of the product are 100 and 10 units average demand over leadtime= average demand x leadtime=500 x 2=
per week, respectively, and the desired cycle service level is 95%, what 1000
should be the order up to level? S = u x (T + L) + z x SQRT (T + L) safety stock= 2000-1000=1000
T + L = 5 + 4 = 9 weeks average inventory= 62.5+1000=1062.5
Expected demand: u x (T + L) = 100 x 9 = 900 units average flow time= 1062.5/500=2.125 or 2.13 weeks
SS = z x SQRT (T + L) = 1.645 x 10 x SQRT (9) = 49.35 units  Marlo Stanfield's operation also uses large quantities of prepaid cell
Order-up-to level: S = 900 + 49.35 = 949.35 units phones, on average 1500 per week with a standard deviation of 145. The
 The average weekly demand is 1000 and the standard deviation is 10. lead time for their own brand of prepaid cell phones is three weeks and
The lead time is 4 weeks. What is the standard deviation of demand over they have a lot size of 350 phones. To ensure they never run out, they
lead time assuming the weekly demands are independent? keep a safety stock of 500 phones with Proposition Joe. What is the fill
Standard Deviation over Lead Time = Sqrt (Lead Time x (Weekly rate under this policy? fill rate= 1- ESC/Q from 12-6
Standard Deviation)^2) ESQ=-500 *
Variance over Lead Time=L x = 4 x (10)^2 = 4 x 100 = 400 (1-NORMSDIST(500/251))+251*NORMDIST(500/251,0,1,0)=2.177
Standard Deviation over Lead Time = Sqrt 400 = 20 fillrate=1-2.177/350=0.99378
 What is the required safety stock if the demand's mean and standard  The tenured professor routinely led student groups on factory tours in
deviations are 1000 and 10 units per week, the mean and standard exotic locales, and one popular destination was an island south of
deviation of lead time are 10 and 2 weeks, and the desired cycle service Miami. The students enjoyed this happy little island and the professor
level is 95%? standard deviation of demand over lead time= SQRT liked it because he could supplement his income by bringing back a few
(10× 10^2 + 2^2 × 1000^2) = 2000.2 boxes souvenirs he could sell to his friends. The souvenirs cost the
Z=N ORMSINV (95%) =1.645 => ss=1.645 × 2000=3290
professor $125 a box and he sells them for $290 a box. Souvenirs that
SELF ASSESMENT MATH:
 The rising popularity of bubble and squeak as a breakfast item on the dry out due to age can be sold for $80. Experience has shown that the
menu has resulted in a steady demand for peas. Over the course of the demand for boxes of these souvenirs has a mean of 80 with a standard
past week, 457 patrons have ordered the hearty breakfast and each deviation of 20. The professor's suitcase has room for 50 boxes of
serving contains a half cup of English peas. It costs two cents to hold a souvenirs. How many boxes does he expect to have left once his
half cup of peas in inventory for a year and $3 to place an order friends have bought what they want?
(remember they come all the way from England!). It takes two weeks to
ship a container from England loaded with peas.What is the average Cu= p-c=290-125= 165
inventory if they order at the optimal order quantity? average Co=125-80=45
inventory= Order quantity/2= 1335/2=667.5 CSL=Cu/(Cu+Co)=165/(165+45)=0.7857
O*= norminv(CSL,µ,σ)=norminv(0.7857,80,20)= 95.83
 The rising popularity of bubble and squeak as a breakfast item on the
Suitcase has capacity of 50 => O=50
menu has resulted in a steady demand for peas. Over the course of the
overstock ==(50-80)*NORMSDIST((50-80)/20)+20*NORMDIST((50-
past week, 457 patrons have ordered the hearty breakfast and each
80)/20,0,1,0)=0.6 or 1
serving contains a half cup of English peas. It costs two cents to hold a
What is the optimal quantity of boxes for the professor to bring back
half cup of peas in inventory for a year and $3 to place an order
home to sell to his friends?
(remember they come all the way from England!). It takes two weeks to
Cu= p-c=290-125= 165
ship a container from England loaded with peas.What is the cost of the
Co=125-80=45
inventory policy (excluding cost of goods) if the diner orders at the
CSL=Cu/(Cu+Co)=165/(165+45)=0.7857
economic order quantity? annual holding cost= average inventory x
O*= norminv(CSL,µ,σ)=norminv(0.7857,80,20)= 95.83 or 96
H= lot size/2 *H=(1335/2)*2*0.02= 26.7
Naturally, the professor will purchase the optimal number of boxes.
annual ordering cost=
(He's had a course or two in supply chain management and knows this
(Annualdemand/lotsize)xS=( 457*0.5*52/1335)* S= 26.7
model well.) What is the expected number of boxes that he doesn't sell?
total=53.4
O=96 (optimal quantity)
How many orders per year does the diner place if they order at the economic
Expected overstock
order quantity? number of orders=(annual demand/ lot size) *
=(96-80)*NORMSDIST((96-80)/20)+20*NORMDIST((96-80)/20,0,1,0)=
S=(457*0.5*52)/1335=8.9 or 9
18.4
What is the average flow time of a half cup of peas if the diner orders at the
economic order quantity? average flow time= average inventory/demand=
(1335/2)/(457*0.5)=2.92 weeks
 Avon Barksdale's operation uses large quantities of prepaid cell
phones, on average 500 per week with a standard deviation of 45.
The lead time for their own brand of prepaid cell phones is two
 weeks and they have a lot size of 125 phones. Suppose Mr.
Barksdale sets his reorder point at 1100 phones. What is his
average cell phone inventory?

Chapter 11 Assignments:
1.The inventory for an item in a company grows gradually. The item arrives
at the rate of 20 units per week and is used with the rate of 5 units per week.
The item costs $2,000 per unit. The setup / ordering cost is $10,000 and the
annual holding cost is 25 percent of the cost. NORMSINV (0.99) = 2.326
A)Which one the following models should be used: EOQ (Economic Order Current Supplier:
Quantity) model or POQ (Production Order Quantity) model? Why? SS=2.326 * 8 * 1000= 6579
B)What is the optimal lot size? SS holding cost + Material cost= 6579* 0.25 * 20000+ 1000 motors per
C)What is the annual setup cost of the optimal policy? week * 52 weeks * $20000= 1,072,895,000
D)What is the annual holding cost? Local Supplier
a) POQ, because inventory grows gradually SS=2.326 * 1 * 1000= 2326
b) Q*=(2DS/hC(1-d/p)=(2*5*52*10000/(0.25*2000*(1-5/20)))=118 SS holding cost + Material cost= 2326* 0.25 * 20400+1000 motors per
c) Setup cost=5*52*10000/118=22,033 week * 52 weeks * $20400= 1,072,662,600
d) Holding cost=Maximum Inventory*(1-d/p) *hC/2=(1- Saving= 1,072,895,000 - 1,072,662,600=232,400 Yes.
5/20)*118*0.25*2000/2=22,125  Optimal order size=30000 4) Grape, a clothing retailer, has started selling through its online channel
2.The Blue company has introduced a new music device called Juke. The along with its retail stores. Management has to decide which products to
production cost for Blue is $100 per Juke. Juke is sold through Buy-Buy, a carry at the retail stores and which products to carry at a central
major electronics retailer. Buy-Buy has estimated that demand for Juke will warehouse to be sold only via the online channel. Grape currently has
depend on the final retail price p according to the demand curve 900 retail stores in the United States. Weekly demand for size large
Demand D=2,000,000−2,000 p
khaki pants at each store is normally distributed, with a mean of 800 and
A)What wholesale price should Blue charge for Juke? At this wholesale
a standard deviation of 100. Each pair of pants costs $30. Weekly
price, what retail price should Buy-Buy set? What are the profits for Blue
and Buy-Buy at equilibrium? demand for purple cashmere sweaters at each store is normally
B)If Blue decides to discount the wholesale price by $40, how much of a distributed, with a mean of 50 and a standard deviation of 50. Each
discount should Buy-Buy offer to customers if it wants to maximize its own sweater costs $100. Grape has an annual holding cost of 25 percent.
profits? What fraction of the discount offered by Blue does Buy-Buy pass Grape manages all inventories using a continuous review policy, and the
along to the customer? supply lead time for both products is four weeks. The targeted CSL is 95

A)D=A-Bp  CR¿
A CM , D=2000000-2000p  CR
percent. How much reduction in holding cost per unit sold can Grape
+ expect on moving each of the two products from the stores to the online
2B 2 channel? Which of the two products should Grape carry at the stores,
2000000 100 and which should it carry at the central warehouse for the online
¿ + =550
2∗2000 2 channel? Why? Assume demand across stores and from one week to the
A CR 2000000 550
+ =775
next to be independent.
p= +  p=¿
2B 2 2∗2000 2 Pants
Demand=2000000-2000*775=450000 Disaggregated Option:
Buy-Buy’s profit= 450000*(775-550)=101,250,000 DL = LD = (4)(800) = 3200
Blue’s profit=450000*(550-100)= 202,500,000
L =L D = √ 4 (100) = 200
2000000 510
b) CR¿ 550−40=510  p= + =755 775- ss per store = FS−1 (CSL)  L = FS−1 (0.95)  200 = 329 (where, FS−1 (0.95)
2∗2000 2 = NORMSINV (0.95))
755=20 50% of discount Total safety inventory = (329)(900) = 296,074
3.The Blue company prices Jukes at $550 per unit. Buy-Buy sells Jukes at Total annual safety inventory holding cost = (296,074)(30) (0.25) =
$775. Annual demand at this retail price turns out to be 45,000 units. Buy- $2,220,552
Buy incurs ordering, receiving, and transportation costs of $10,000 for each
lot of Jukes ordered. The annual holding cost used by the retailer is 20 Aggregated Option:
percent. Dc=kD = (900)(800) = 720000
A.What is the optimal lot size that Buy-Buy should order? CD= k  = √ 900(100) = 3000
B.The Blue company has discounted Jukes by $40 for the short term (about
DL = LDC = (4)(800)(900) = 2,880,000
the next two weeks). Buy-Buy has decided not to change the retail price but
L= √ L σ D = √ 4 (3000) = 6000
C
may change the lot size ordered from Blue. How should Buy-Buy adjust its
lot size given this discount? How much does the lot size increase because of ss = FS (CSL)  L = FS−1 (0.95)  6,000 = 9,869 (where, FS−1(0.95) =
−1

the discount? NORMSINV (0.95))

a) Q*=(2DS/hC)=(2*45000*10000/(0.20*550))=2860 Total safety inventory = 9,869
b) Qd=dD/((C-d)h)+ CQ*/(C-d)=(40)(45000)/((550-40)0.20)+(550) Total annual safety inventory holding cost = (9,869) (30) 0.25) = $74,018
(2860)/(550-40)=20,731 20731-2860=17,871
Chapter 12: Savings in the holding cost = $2,220,552 - $74,018= 2,146,534
1) Weekly demand for electric motors at a motor manufacturer is normally Saving per unit= 2,146,534/720000=2.98
distributed, with a mean of 1,000 and a standard deviation of 1,000.
Motors are currently delivered at a cost of $20,000 per motor. The Sweaters:
supplier takes eight weeks to supply an order. A local manufacturer has Disaggregated Option:
offered to deliver motors with a lead time of one week at a cost of DL = LD = (4)(50) = 200
$20,400 per motor. The motor manufacturer is targeting a CSL of 99 L =L D = √ 4 (50) = 100
percent and monitors its inventory continuously. The manufacturer ss per store = FS−1 (CSL)  L = FS−1 (0.95)  100 = 164 (where, FS−1 (0.95)
incurs an annual holding cost of 25 percent. Should the manufacturer = NORMSINV (0.95))
accept the local supplier’s offer? Total safety inventory = (164)(900) = 147,600
Total annual safety inventory holding cost = (147,600 )(100) (0.25) =
Total cost = Annual order cost + Cycle inventory holding cost+ SS $3,690,000
holding cost + Material cost Aggregated Option:
Annual order cost and cycle inventory holding cost are the same for both Dc=kD = (900)(50) = 45000
options. CD= k  = √ 900(50) = 1500
To decide we just need to compare SS holding cost + material cost of the DL = LDC = (4)(50)(900) = 180000
two options.
L = √ L σ D = √ 4 (1500) = 3000
C
SS holding cost + Material cost= SS * p * h + 52 * D * p
ss = FS−1 (CSL)  L = FS−1 (0.95)  3000 = 4935 (where, FS−1 (0.95) =
NORMSINV (0.95))
Total safety inventory = 4,935
SS= Z * standard deviation of demand in lead time= Z * L * D =
NORMSINV(CSL) * L * D Cost of Holding In-Transit Inventory = (180000)(100)(0.2) = $3,600,000
Total Costs (including in-transit inventory) = $3,029,140 + $3,600,000 =
$6,629,140
Total annual safety inventory holding cost = (4935)(100) (0.25) =
$123,364
Air Transportation:
Total inventory cost (cycle + safety) = (2500 + 18611)(100)(0.2) =
Savings in the holding cost = $3,690,000 - $123,364=$3,566,636
$422,220
Saving per unit=$3,566,636/45000=$79.5
Transportation cost per year = (1.5)(5000)(365) = $2,737,500
Annual Holding Cost + Transportation Cost = $422,220 + $2,737,500 =
Alorotom obtains cell phones from its contract manufacturer located in $3,159,720
China to supply the U.S. market. Daily demand at the U.S. warehouse is In-Transit Inventory = DL = (5000)(4) = 20000
normally distributed, with a mean of 5,000 and a standard deviation of 4,000. Cost of Holding In-Transit Inventory = (20000)(100)(0.2) = $400,000
The warehouse aims for a CSL of 99 percent. The company is debating Total Costs (including in-transit inventory) = $3,159,720 + $400,000 =
whether to use sea or air transportation from China. Sea transportation results $3,559,720
in a lead time of 36 days and costs $0.50 per phone. Air transportation results
in a lead time of 4 days and costs $1.50 per phone. Each phone costs $100,
and Alorotom incurs an annual holding cost of 20 percent. Given the
Formulas:
minimum lot sizes, Alorotom would order 100,000 phones at a time (on Production Order Quantity (gradual growth, POQ) =

√
average, once every 20 days) if using sea transport and 5,000 phones at a 2 DS
time (on average, daily) if using air transport. To begin with, assume that
Alorotom takes ownership of the inventory on delivery. d (optimal)
hC(1− )
a. Assuming that Alorotom follows a continuous review policy, what p

√
reorder point and safety inventory should the warehouse aim for when
using sea or air transportation? How many days of safety inventory will Economic order Quantity (EOQ) =
2 xSxD
Alorotom carry under each policy? H
b. How many days of cycle inventory does Alorotom carry under each New EOQ = √ (% inc¿)¿  (Answer – 1) * 100
policy?
c. Under a continuous review policy, do you recommend sea or air
D Q D
transportation if Alorotom does not own the inventory while it is in Setup cost = Annual Holding Cost = (1- ¿ H
transit? Does your answer change if Alorotom has ownership of the QxS 2 p
inventory while it is in transit?
Safety Stock = Z * Oz Holding Cost = ss
A)Sea Transportation:
Average batch size = DT = (5000)(20) = 100,000
Total safety stock = K * ss
L = √ L❑D = √ 36( 4000) = 24,000
ss = FS−1 (CSL)  L = FS−1 (0.99)  24000 = 55832 (where, FS−1 (0.99) =
Total cost = ( EOQ∗H∗C ¿/2 + (Month/yr*D*S)/# of orders +
NORMSINV (0.99))
ROP=DT+ss=100000+55832=155832 (month/yr*D*C)
Days of safety inventory = 55832/5000 = 11.17 days
D= A−BpC R=
A C
+ A CR
Air Transportation:
P= +
2∗B 2 2B 2
Average batch size = DT = (5000) (1) = 5,000
L = √ L σ D = √ 4 (4000) = 8,000
C
D = A-B*P. profit = D *(P-C R ¿ or = D* (C R −C ¿
ss = FS−1 (CSL)  L = FS−1 (0.99)  8000 = 18,611 (where, FS−1 (0.99) =
NORMSINV (0.99))
ROP=DT+ss=100000+18611=118,611 A discount p
Discount p ¿ C R −discount → P= +  org p –
Days of safety inventory = 18611/5000 = 3.72 days 2∗B 2
new p
B)Sea Transportation:
Average cycle inventory = batch size/2 = 100000/2 = 50,000 Annual holding and transportation cost= QhC/2+D(S+s)/Q
Days of cycle inventory = 50000/5000 = 10 days

Air Transportation: D
Average inv = production q / 2(1- )
Average cycle inventory = batch size/2 = 5000/2 = 2,500 P
Days of cycle inventory = 2500/5000 = 0.5 days
Variables
Sea Transportation:
Setup (fixed) cost = S
Total inventory cost (cycle + safety) = (50000 + 55832) (100)(0.2) =
$2,116,640 Production rate = P
Transportation cost per year = (0.5)(5000)(365) = $912,500 Lead Time = L
Annual Holding Cost + Transportation Cost = $2,116,640 + $912,500 = Cost (price paid/unit and material) = C
$3,029,140
In-Transit Inventory = DL = (5000)(36) = 180,000 Safety stock (required service) =K
Holding cost (carry one inv into specific period) = H

EOQ (ECONOMIC ORDER QUANITIY): remains steady

POQ (PRODUCT ORDER QUANTITY) : grows gradually