Assignment I

1. You are given the following partial demand and forecast data for a product:

Quarter (t): 4 5 6
Forecast (Ft): 400 430 600
Demand (Dt): 420 370 680

a) Compute a 3-quarter simple moving average forecast for quarter 7.

2. The University Gift Shop purchases sweatshirts emblazoned with the school name and logo
from a vendor in Toronto. The vendor sells the sweatshirts to the Gift Shop for $34.99
apiece. Shipping from Toronto to London costs $110 per order. When an order arrives, it has
been estimated that receiving and inspection tasks cost the Gift Shop $25. The annual
holding cost for a sweatshirt is calculated as 11% of the purchase cost. The Gift Shop
manager estimates that 3100 sweatshirts will be sold during the upcoming academic year.
a) Determine the optimal order quantity using the basic EOQ model.
b) The vendor has recently offered a 3% discount on the purchase price if the Gift Shop
orders 500 or more but less than 2000 at a time, and a 5% discount if the Shop orders
2000 or more at a time. Would you take up one of these offers? If so, what is the new
optimal order quantity, and if not, why not? Use the same holding cost from part a)
throughout this question.
c) Based on your answer in part b), how many orders will there be in a year? What is the
annual average inventory level?
d) Based on your answer in part b), what is the reorder point if the lead time is 3 business
days? Assume that there are 260 business days a year.
e) In parts a) and b), one type of the main inventory management costs has not been included
in calculating the optimal order quantity. What is it and why has it been left out?

3. Big Value Supermarket stocks Crunchies Cereal. The demand for Crunchies was 10,200
boxes in year 6. The demand forecast for year 7 is calculated using exponential
smoothing with α = 0.12 (the forecast for year 6 was 9500 boxes). It costs Big Value $80
per order of Crunchies and $0.85 per box annually to keep the cereal in storage. The store
manager wants to know what the optimal inventory management policy is for Crunchies
in year 7. Determine the optimal policy and describe it based on a periodic review
system. What is the total cost associated with the optimal policy, and what is the average
inventory level of Crunchies? Assume that Big Value operates 365 days per year.
4. ABC Computers assembles microcomputers from generic components. It purchases its
colour monitors from a manufacturer in Taiwan with a lead time of 21 days. Daily
demand for monitors is normally distributed with a mean of 3.5 monitors and a standard
deviation of 1.7 monitors. ABC has determined that the ordering cost is $325 per order,
the annual holding cost is $25 per monitor, and the stockout cost is $450 per lost sale.
Currently ABC calculates the safety stock level for monitors based on a 90% service
level. If ABC is willing to spend 50% more on managing safety stock, what service level
could be achieved? The number of standard deviations is 1.28 for 90% service level, 1.65
for 95%, 2.05 for 98%, and 2.33 for 99%. ABC uses a continuous review system.
5. Richmond Street Microbrewery makes Western Beer, which it bottles and sells in its
adjoining pub/restaurant and by the case. It costs $1100 to set up, brew and bottle a batch
of the beer. The annual cost to store the beer is $2.75 per bottle. The annual demand for
the beer is 16,000 bottles and the brewery has the capacity to produce 28,000 bottles
annually. The current production policy is to continue producing the beer until the storage
gets full. The storage holds a maximum of 750 bottles of beer. Production starts again
when the inventory of beer is depleted. The owners of the brewery are considering an
option of increasing the beer storage space to hold a maximum of 3000 bottles as part of
their expansion strategy for the next five years. Is this a good option in terms of the cost
savings? Why or why not? Comment also on the current policy of producing the beer
until the storage is full. What would be an optimal production policy for the brewery?
Lastly, determine how many production days are required for the optimal production
policy (assume one year = 365 days).
6. The following table shows demand and forecast data for a product in number of units.
Period 1 2 3 4 5
Demand 70 100 160 100 85
Forecast 90 110 100 110 100
a) Your friend, Norman Bates, calculated F6 from the data above, and told you that F6 is
165. Could he have used a 3-period weighted moving average to obtain his F6?
Justify your answer briefly.
b) You are considering using exponential smoothing or simple moving average to
calculate F6. Norman tells you that exponential smoothing only includes the most
recent demand and ignores earlier demands, so simple moving average is better. Is his
right? Justify your answer briefly.

7. A company manufactures a product from a raw material which is purchased at Birr 60 per
kg. The company incurs a handling cost of Birr 360 plus freight of Birr 390 per order.
The incremental carrying cost of inventory of raw material is Birr 0.50 per kg. per month.
In addition, the cost of working capital finance on the investment in inventory of raw
material is Birr. 9 per kg. per annum. The annual production of the product is 1,00,000
units and 2.5 units are obtained from one kg. of raw material.
Required:
(1) Calculate the Economic Order Quantity of raw materials.
(2) Advise, how frequently order for procurement should be placed.
(3) If the company proposes to rationalize placement of orders on quarterly basis,
what percentage of discount in the prices of raw material should be negotiated?