Tutorial 5 Supply Chain and Inventory

Tutorial 6 Supply Chain and Inventory
1. Baker Mfg. Inc. wishes to compare its inventory turnover to those of industry leaders,
who have turnover of about 13 times per year and 8% of their assets invested in
inventory.
(a) What is Baker’s inventory turnover?
(b) What is Baker’s percent of assets committed to inventory?
(c) How does Baker’s performance compare to the industry leaders?
(P 11.5)
2. Arrow Distributing Corp. likes to track inventory by using weeks of supply as well
as by inventory turnover.
(a) What is its weeks of supply?
(b) What percent of Arrow’s assets are committed to inventory?
(c) What is Arrow’s inventory turnover?
(d) Is Arrow’s supply chain performance, as measured by these inventory
metrics, better than that of Baker?
(P11.6)
3. Boreki Enterprises has the following 10 items in inventory. Theodore Boreki asks
you, a recent OM graduate, to divide these items into ABC classifications
(a) Develop an ABC classification system for the 10 items.

(b) How can Boreki use this information?
(c) Boreki reviews the classification and then places item A2 into the A category.
Why might he do so?
(P12.2)
4. Henry Crouch’s law office has traditionally ordered ink refills 60 units at a time.
The firm estimates that carrying cost is 40% of the $10 unit cost and that annual
demand is about 240 units per year. The assumptions of the basic EOQ model
are thought to apply.
(a) For what value of ordering cost would its action be optimal?
(b) If the true ordering cost turns out to be much greater than your answer to (a),
what is the impact on the firm’s ordering policy?
(P12.9)
5. Thomas Kratzer is the purchasing manager for the headquarters of a large

insurance company chain with a central inventory operation. Thomas’s fastest-
moving inventory item has a demand of 6,000 units per year. The cost of each
unit is $100, and the inventory carrying cost is $10 per unit per year. The average
ordering cost is $30 per order. It takes about 5 days for an order to arrive, and the
demand for 1 week is 120 units. (This is a corporate operation, and there are 250
working days per year.)
(a) What is the EOQ?
(b) What is the average inventory if the EOQ is used?
(c) What is the optimal number of orders per year?
(d) What is the optimal number of days in between any two orders?
(e) What is the annual cost of ordering and holding inventory?
(f) What is the total annual inventory cost, including the cost of the 6,000 units?
(P12.14)
6. M. Cotteleer Electronics supplies microcomputer circuitry to a company that

incorporates microprocessors into refrigerators and other home appliances. One
of the components has an annual demand of 250 units, and this is constant
throughout the year. Carrying cost is estimated to be $1 per unit per year, and the
ordering (setup) cost is $20 per order.
(a) To minimize cost, how many units should be ordered each time an order is
placed?
(b) How many orders per year are needed with the optimal policy?
(c) What is the average inventory if costs are minimized?
(d) Suppose that the ordering (setup) cost is not $20, and Cotteleer has been
ordering 150 units each time an order is placed. For this order policy (of Q =
150) to be optimal, determine what the ordering (setup) cost would have to be
(P12.17)
7. Arthur Meiners is the production manager of WheelRite, a small producer of metal

parts. Wheel-Rite supplies CalTex, a larger assembly company, with 10,000 wheel
bearings each year. This order has been stable for some time. Setup cost for
Wheel-Rite is $40, and holding cost is $.60 per wheel bearing per
year. Wheel-Rite can produce 500 wheel bearings per day. CalTex is a just-in-time
manufacturer and requires that 50 bearings be shipped to it each business day.
(a) What is the optimum production quantity?
(b) What is the maximum number of wheel bearings that will be in inventory at
Wheel-Rite?
(P12.20)
8. Bell Computers purchases integrated chips at $350 per chip. The holding cost is
$35 per unit per year, the ordering cost is $120 per order, and sales are steady, at
400 per month. The company’s supplier, Rich Blue Chip Manufacturing, Inc.,
decides to offer price concessions in order to attract larger orders. The
price structure is
(a) What is the optimal order quantity and the minimum annual
cost for Bell Computers to order, purchase, and hold these
integrated chips?
(b) Bell Computers wishes to use a 10% holding cost rather than
the fixed $35 holding cost in (a). What is the optimal order
quantity, and what is the optimal annual cost?
(P12.22)
9. The catering manager of La Vista Hotel, Lisa Ferguson, is disturbed by the amount
of silverware she is losing every week. Last Friday night, when her crew tried to
set up for a banquet for 500 people, they did not have enough knives. She decides
she needs to order some more silverware, but wants to take advantage of any
quantity discounts her vendor will offer.
For a small order (2,000 or fewer pieces), her vendor quotes a price of $1.80Ypiece.
If she orders 2,001–5,000 pieces, the price drops to $1.60Ypiece. 5,001–10,000

pieces brings the price to $1.40Ypiece, and 10,001 and above reduces the priceto
$1.25.
Lisa’s order costs are $200 per order, her annual holding costs are 5%, and the
annual demand is 45,000 pieces. For the best option:
(a) What is the optimal order quantity?

(b) What is the annual holding cost?
(c) What is the annual ordering (setup) cost?
(P12.24)
10. Emarpy Appliance is a company that produces all kinds of major appliances. Bud
Banis, the president of Emarpy, is concerned about the production policy for the
company’s bestselling refrigerator. The annual demand has been about 8,000
units each year, and this demand has been constant throughout the year. The
production capacity is 200 units per day. Each time production starts, it costs the
company $120 to move materials into place, reset the assembly line, and clean
the equipment. The holding cost of a refrigerator is $50 per year. The current
production plan calls for 400 refrigerators to be produced in each production run.
Assume there are 250 working days per year.
(a) What is the daily demand of this product?
(b) If the company were to continue to produce 400 units each time production
starts, how many days would production continue?
(c) Under the current policy, how many production runs per year would be
required? What would the annual setup cost be?
(d) If the current policy continues, how many refrigerators would be in inventory
when production stops? What would the average inventory level be?
(P12.30)
11. Barbara Flynn is in charge of maintaining hospital supplies at General Hospital.

During the past year, the mean lead time demand for bandage BX-5 was 60 (and
was normally distributed). Furthermore, the standard deviation for BX-5 was 7.
Ms. Flynn would like to maintain a 90% service level.
(a) What safety stock level do you recommend for BX-5?
(b) What is the appropriate reorder point?
(P12.41)
12. Mr. Beautiful, an organization that sells weight training sets, has an ordering cost
of $40 for the BB-1 set. (BB-1 stands for Body Beautiful Number 1.) The carrying
cost for BB-1 is $5 per set per year. To meet demand, Mr. Beautiful orders large
quantities of BB-1 seven times a year. The stockout cost for BB-1 is estimated to
be $50 per set. Over the past several years, Mr. Beautiful has observed the
following demand during the lead time for BB-1. The reorder point for BB-1 is 60
sets. What level of safety stock should be maintained for BB-1.
Demand during lead time 40 50 60 70 80 90
Probability .1 .2 .2 .2 .2 .1
(P12.45)

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Tutorial 6 Supply Chain and Inventory

(a) Develop an ABC classification system for the 10 items.

5. Thomas Kratzer is the purchasing manager for the headquarters of a large

6. M. Cotteleer Electronics supplies microcomputer circuitry to a company that

7. Arthur Meiners is the production manager of WheelRite, a small producer of metal

If she orders 2,001–5,000 pieces, the price drops to $1.60Ypiece. 5,001–10,000

(a) What is the optimal order quantity?

11. Barbara Flynn is in charge of maintaining hospital supplies at General Hospital.

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