Problems solved in the class

1
 GLOBAL
Problem - 1
• HighMed. Inc is a manufacturer of medical equipment used in heart procedures and located in
Wisconsin and cardiologist all over North America uses its equipments. HighMed has currently
divided the United States into 24 territories, each with its own sales force. HighMed maintains
sufficient safety inventories in each territory to provide a CSL (Cycle Service Level) of 0.997 for each
product. It’s products fall into two categories – Highval and Lowval. Highval products weigh 0.1 lbs
and cost $200 each. Lowval products weigh 0.04 lbs and cost $ 30 each. Weekly demand for Highval
products in each territory is normally distributed with a mean of µ H = 2 and a standard deviation of H
= 5. Weekly demand for Lowval products in each territory is normally distributed with a mean of µ L
= 20 and a standard deviation of  L =5. Holding cost of inventory is 25%. Currently, the company
follows replenishment model where it replenishes all the 24 stocking points once a week as per the
weekly demand. It’s replenishment lead time is 1 week and the reorder interval is 1 week. The
transportation cost to serve ship each of it’s location is $0.66 + 0.26 x, (where x is the quantity shipped
in pounds).
The company is looking at the option of aggregating the inventory at a single location. It want to
eliminate inventories at all the 24 stocking points and would like to serve the customer directly from a
single location. It’s average customer order is for 1 unit of HighVal and 10 units of Lowval. It’s
transportation cost, if the customer orders are shipped from a single location would be $5.53 + 0.53x,
(where x is the quantity shipped in pounds).
Calculate the inventory carrying cost and transportation cost in both the scenarios. Which scenario
result in the least total cost. (Normsinv(0.997) = 2.75). Ignore the in-transit inventory cost and last
mile
2
customer delivery transportation cost in the first case as it is very low.
 GLOBAL

Problem - 2

• Eastern Electric (EE) is an appliance manufacturing company in Calcutta. It purchases all

the motors for its appliances from Northern motors located in New Delhi. EE purchases
120,000 motors each year from Northern motors at an average price of Rs. 120 per motor.
Demand has been relatively constant for several years and is expected to stay that way.
Each motor averages 10 kgs in weight. Northern motors ships each EE order within a day
of receiving it. At its assembly plant, EE carries a safety inventory equal to 50% of the
average demand for motors during the delivery lead time. EE traditionally purchased
motors from Golden carrier in the lot of 500 units at the transportation rate of Rs. 0.08 per
kg. Golden carrier’s transit time is 3 days. You are the supply chain manager and has got
a new offer from Indian Railways which offers you a transportation rate of Rs. 0.065 per
kg, transit time of 5 days but the minimum lot size should be 2,000 units. Perform the
transportation and Inventory cost trade-off in both the cases and determine the total
inventory cost. Assume ordering cost as nil and EE purchases all its consignment on FOB,
Factory basis on cash payment. Consider Inventory Carrying Cost as 20%

3
 GLOBAL

An appliance manufacturer located in Pittsburg purchases 3,000 cases of plastic

parts valued at $100 per case from 2 suppliers. Purchases are currently divided
equally between the suppliers. Each supplier uses rail transport and achieves the
same average delivery time. However, for each day that a supplier can reduce
the average delivery time, the appliance manufacturer will shift 5 percent of its
total purchases or 150 cases to the supplier offering the premium delivery
service. A supplier earns a margin of 20 percent on each case before
transportation charges. Supplier A would like to consider whether it would be
beneficial to switch from rail to air or truck modes. The following transportation
rates per case and average delivery times are known for each mode:

Transport Mode Transport Rate Delivery Time

Rail $2.50 / Case 7 days

Truck $ 6.00 / Case 4 days

Air $10.35 / Case 2 days
4
 GLOBAL
ABC CLASSIFICATION: ILLUSTRATION
Product Type Number of Units Unit Price (Rs)
1 1000 2.5
2 250 0.55
3 150 6.5
4 300 1
5 100 1.5
6 700 1.43
7 500 7.0
8 15 4.98
9 1000 0.75
10 600 1.62
11 25 33
12 4 15.5
13 1000 5
14 2850 2.5
15 10 0.83
16 355 0.98
17 50 1.37
18 393 1.85

5
1.Company A is a highly diversified company with each business organized as SBUs (Strategic
Business Unit). Two of it’s SBUs- Soap division and Coal division has a single Logistics and Supply
Chain Head, Mr. Gujral. Cost of Coal is Rs. 10 per kg and the cost of Soap is Rs. 300 per kg. Annual
demand is 2000T each for Coal and Soap and distributed across the country. Mr. Gujral is reviewing
two options for the logistics system for Soaps and Coal. The characteristic of 2 options is given in the
table below:
Option 2
Option 1
Mode Water Road
Minimum Lot Size 500 Tonnes 100 Tonnes
Average Transportation Rs. 1 per kg Rs. 8 per kg
costs (considering all
locations)
Average Inventory 500 T 100 Tonnes
throughout the year
(considering all factors like
lead time, uncertainty,
safety stock etc)
Inventory Holding Cost 25% 25%
Considering only Tansportation and Inventory Holding as the logistics costs, suggest which system is
suitable
6 for each product?
“Sada Shop” is planning to open retail outlets in Pune. It’s aim is
to end FY 2009 with 25 stores. It has got a supplier base of 300
vendors who are located locally in and around Pune. Each
vendor will make 2 deliveries a week. CEO of “Sada Shop” is
considering the direct shipment model whereby the vendors will
send the consignments directly to the store. He feels this is quite
simple and efficient and would ensure smooth running of the
supply chain. But the SCM head of the company feels there
would be a lot of problems in this model in terms of number of
transactions at the Store level. And the best model is to have a DC
in Pune whereby the suppliers would be supplying to DC twice a
week and at DC . Each store would receive 2 shipments from the
DC. Compare the two options.