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Review and Discussion Questions
1. Distinguish between dependent and independent demand in a McDonald’s, in an integrated manufacturer of personal copiers, and in a pharmaceutical supply house. The key to the answer here is to consider what must be forecasted (independent demand), and, given the forecast, what demands are thereby created for items to meet the forecasts (dependent demand). In a McDonald’s, independent demand is the demand for various items offered for sale—Big Macs, fries, etc. The demand for Egg McMuffins, for example, needs to be forecasted. Given the forecast, then, the demand for the number of eggs, cheese, Canadian bacon, muffins, and containers can then be computed based on the amount needed for each Egg McMuffin. The manufacturer of copiers is integrated, i.e., the parts, components, etc. are produced internally. The demand for the number of copiers is independent (must be forecasted). Given the forecast, the Bill of Materials is exploded to determine the amounts of raw materials, components, parts, etc. that are needed (more on the BOM in chapter 16). The pharmaceutical supply company is an extreme case where only end items are carried and nothing is produced internally. The bill of materials is the end item and, therefore, the independent demand (forecasted from customers) is the same as the dependent demand. One might attempt to consider that when the demand for items occurs together, that this is similar to a bill of materials. However, this is not a bill of materials, but rather a causal relationship making it easier to forecast. 2. Distinguish between in-process inventory, safety stock inventory, and seasonal inventory. In-process inventory consists of those items of materials components and partially completed units that are currently in the production process. Safety-stock inventory is set so that inventory is maintained to satisfy some maximum level of demand. It could be stated that safety stock is that level of inventory between the minimum expected demand and the desired level of demand satisfaction. Seasonal inventory is that inventory accumulated to meet some periodic increase in demand. 3. OMIT 4. Under which conditions would a plant manager elect to use a fixed-order quantity model as opposed to a fixed-time period model? What are the disadvantages of using a fixed-time period ordering system? Fixed-order quantity models–when holding costs are high (usually expensive items or high deprecation rates), or when items are ordered from different sources.
may be based on a ratio of its required square footage and the entire available warehouse space. It also requires a periodic count and closer surveillance than a fixed-order quantity system. when we consider an inventory ordering cost based on the number or orders per year (as is done in most inventory models). The terms carrying or holding costs for maintaining goods in inventory include a multitude of cost elements. obsolescence. as the frequency increases. therefore. This latter method requires very little attention. OMIT 7. Consider the time for making a setup in preparation for a production run. holding costs are based on the average inventory on hand. unique cost does not exist for each product. Take the warehouse that is too large. Warehouse storage costs of an item. for example. for example. in fact. and carrying cost. yet each requires realistic analysis. or when several items are ordered from the same source (saves on order placement and delivery charges). excess storage space should create pressure for higher—not lower—order quantities. In the purchasing department. or is used to stock products in an off season or depressed period. How valid are they? Investigation of ordering and production setup cost will likely show that a single. when. In the simple inventory model. resulting in an averaged or allocated cost for each order he places. To determine the nature and amounts of these costs can be a challenging feat.Chapter 15 Fixed-time period models—when holding costs are low (i. total inventory cost curves tend to be dish shaped and can. tolerate some error. The cost for that employee is sometimes divided among the number of items or orders for which he has responsibility. if the setup is repeated often. ―Average‖ inventory presumes that. A fixed-order quantity system can operate with a perpetual count (keeping a running log of every time a unit is withdrawn or replaced) or through a simple two-bin or flag arrangement wherein a reorder is placed when the safety stock is reached. Nonlinearity of costs also occurs in production setups. as stock is depleted. familiarity with the setup allows some shaving of the setup time. low-cost storage). Allocation based on a share of total warehouse cost will result in a high cost for storage. and personnel who are handling materials are extremely difficult to ascertain on an item-by-item basis. reducing the setup time even more.e. reducing the number of orders the individual places does not necessarily decrease the net cost to the firm since his weekly pay remains the same. other product lines will be moved in 192 . Fortunately. 5. Moreover. The holding costs associated with insurance. However. an employee is paid either a salary or an hourly rate for a normal work week. However. ordering cost. The main disadvantage of a fixed-time period inventory system is that inventory levels must be higher to offer the same protection against stockout as a fixed-order quantity system.. Discuss the assumptions that are inherent in production setup cost. but this may not be an accurate representation since it is an allocation of cost rather than true cost. OMIT 6. nor is it linearly related to the number of order (as implied in the equations or inventory models). associated with low-cost items. Setup time is roughly based on an expected frequency of making this particular product run. What happens is really an increase in the ordering cost for each of the remaining items within his responsibility. an investment in specialized equipment or the construction of jigs may become warranted.
The intent. D = 5000. L = 10 days. d = 150. An appropriate model can then be developed in a fashion similar to those covered in this chapter. pilferage. = 30 per week. q d (T L) z T L I T L (T L) 2 (4 3)(30) 2 = 79. more refined handling procedures can be installed to reduce breakage. and I =500 pounds.77 713pounds 193 . Each remaining cost may be similarly challenged. especially if these is an excess of space.64(24. Indeed. each application must consider the operating conditions and needs of the firm. vary with inventory size.98. T = 4 weeks. z = 2. deterioration. and better security procedures can reduce theft. rather. z = 1.495 From Standard normal distribution.05(79.05 q 150(4+3) + 2. Qopt 2 DS H 2(1000 )25 100 = 22. Service level P = . due to environmental requirements).Inventory Control to occupy the space. It may be that costs should be based on maximum inventory. As the value of inventory increases.4) – 500 = 712. insurance rates are lower. L = 3 weeks. = 5 per day.94 219 365 5.36 23 4.4 From Standard normal distribution. PROBLEMS: 3. Breakage.495) 150 = 218. is to prevent the use of any model without clear knowledge of its requirements and assumptions. These challenges to determining true costs are not intended to discourage the use of inventory models. Service level P = . and insurance costs are not constant but. d = 5000/365. T = 14 days. some environmental control and maintenance can be used to reduce deterioration.64 q 5000 (14 10) 1. q d (T L) z T L I T L (T L) 2 (14 10)(5) 2 = 24. rather. or if the needs of an item are so specialized that no other products can use the space (for example.95. and I =150.
25 )18 = $56.000 units at a cost of $18 per pound. C=$19.Chapter 15 14.370 Q 2 1000 2 The best order size is 1.000 or more pounds Cost (C) $20 per pound $19 per pound $18 per pound EOQ 219 pounds 225 pounds 231 pounds Feasible No Yes No Note: EOQ = 2 DS iC Therefore. and at Q=1000. Quantity range Less than 100 pounds 100 to 999 pounds 1. C=$18 TC Q 225.25 )19 = $58.C 19 DC TC Q 1000.C 18 DC D Q 3000 225 S iC 3000 (19 ) 40 (. calculate total cost at Q=225.068 Q 2 225 2 D Q 3000 1000 S iC 3000 (18 ) 40 (. 194 .
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