Management of Inventory Systems (MoIS)

Class Assignment No. – 1

Dr. Abhishek Sharma
Instructions:-
1. All questions carry equal marks
2. Submit the hand-written copy before the deadline as mentioned in email.

Q1. I Carry rents trucks for moving and hauling. Each truck costs the company an average of
$8,000, and the inventory of trucks varies monthly depending on the number that are rented
out. During the first eight months of last year, I Carry had the following ending inventory of
trucks on hand:

I Carry uses a 20 percent annual interest rate to represent the cost of capital. Yearly costs of
storage amount to 3 percent of the value of each truck, and the cost of liability insurance is 2
percent.
a) Determine the total handling cost incurred by I Carry during the period January to
August. Assume for the purposes of your calculation that the holding cost incurred in a
month is proportional to the inventory on hand at the end of the month.
b) Assuming that these eight months are representative, estimate the average annual cost
of holding trucks.

Q2. Penalty costs can be assessed only against the number of units of demand that cannot be
satisfied, or against the number of units weighted by the amount of time that an order stays on
the books. Consider the following history of supply and demand transactions for a particular
part:

Assume that starting inventory at the beginning of January is 480 units.

a) Determine the ending inventory each month. Assume that excess demands are back-
ordered.
b) Assume that each time a unit is demanded that cannot be supplied immediately, a one-
time charge of $10 is made. Determine the stock-out cost incurred during the six months
(1) if excess demand at the end of each month is lost, and (2) if excess demand at the
end of each month is back-ordered.
 c) Suppose that each stock-out costs $10 per unit per month that the demand remains
unfilled. If demands are filled on a first-come, first-served basis, what is the total stock-
out cost incurred during the six months using this type of cost criterion? (Assume that
the demand occurs at the beginning of the month for purposes of your calculation.)
Notice that you must assume that excess demands are back-ordered for this case to
make any sense.
d) Discuss under what circumstances the cost criterion used in part (b) might be
appropriate and under what circumstances the cost criterion used in part (c) might be
appropriate.

Q3. A large automobile repair shop installs about 1,250 mufflers per year, 18 percent of which
are for imported cars. All the imported-car mufflers are purchased from a single local supplier
at a cost of $18.50 each. The shop uses a holding cost based on a 25 percent annual interest
rate. The setup cost for placing an order is estimated to be $28.
a) Determine the optimal number of imported-car mufflers the shop should purchase each
time an order is placed, and the time between placement of orders.
b) If the replenishment lead time is six weeks, what is the reorder point based on the level
of on-hand inventory?
c) The current reorder policy is to buy imported-car mufflers only once a year. What are
the additional holding and setup costs incurred by this policy?

Q4. A specialty coffeehouse sells Colombian coffee at a fairly steady rate of 280 pounds
annually. The beans are purchased from a local supplier for $2.40 per pound. The coffeehouse
estimates that it costs $45 in paperwork and labor to place an order for the coffee, and holding
costs are based on a 20 percent annual interest rate.
a) Determine the optimal order quantity for Colombian coffee.
b) What is the time between placement of orders?
c) What is the average annual cost of holding and setup due to this item?
d) If replenishment lead time is three weeks, determine the reorder level based on the on-
hand inventory.
e) Suppose that its setup cost for ordering was really only $15. Determine the error made
in calculating the annual cost of holding and setup incurred as a result of its using the
wrong value of K. (Note that this implies that its current order policy is suboptimal.)

Q5. The Wod Chemical Company produces a chemical compound that is used as a lawn
fertilizer. The compound can be produced at a rate of 10,000 pounds per day. Annual demand
for the compound is 0.6 million pounds per year. The fixed cost of setting up for a production
run of the chemical is $1,500, and the variable cost of production is $3.50 per pound. The
company uses an interest rate of 22 percent to account for the cost of capital, and the costs of
storage and handling of the chemical amount to 12 percent of the value. Assume that there are
250 working days in a year.
a) What is the optimal size of the production run for this particular compound?
b) What proportion of each production cycle consists of uptime and what proportion
consists of downtime?
c) What is the average annual cost of holding and setup attributed to this item? If the
compound sells for $3.90 per pound, what is the annual profit the company is realizing
from this item?
d) Determine the batch size that would result, if you assumed that the production rate was
infinite. What is the additional average annual cost that would be incurred using this
batch size rather than the one you found?

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Q6. A purchasing agent for a particular type of silicon wafer used in the production of
semiconductors must decide among three sources. Source A will sell the silicon wafers for
$2.50 per wafer, independently of the number of wafers ordered. Source B will sell the wafers
for $2.40 each but will not consider an order for fewer than 3,000 wafers, and Source C will
sell the wafers for $2.30 each but will not accept an order for fewer than 4,000 wafers. Assume
an order setup cost of $100 and an annual requirement of 20,000 wafers. Assume a 20 percent
annual interest rate for holding cost calculations.
a) Which source should be used, and what is the size of the standing order?
b) What is the optimal value of the holding and setup costs for wafers when the optimal
source is used?
c) If the replenishment lead time for wafers is three months, determine the reorder point
based on the on-hand level of inventory of wafers.
d) Assume that two years have passed, and the purchasing agent must recompute the
optimal number of wafers to purchase and from which source to purchase them. Source
B has decided to accept any size offer, but sells the wafers for $2.55 each for orders of
up to 3,000 wafers and $2.25 each for the incremental amount ordered over 3,000
wafers. Source A still has the same price schedule, and Source C went out of business.
Now which source should be used?

Q7. In the calculation of an optimal policy for an all-units discount schedule, you first compute
the EOQ values for each of the three order costs, and you obtain: Q(0) = 800, Q(1) = 875, and
Q(2) = 925. The all-units discount schedule has breakpoints at 750 and 900. Based on this
information only, can you determine what the optimal order quantity is? Explain your answer.

X X X

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