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EIN 4333 - Production and Distribution Systems - Spring 2013 EXAM #1 ANSWER KEY February 20, 2013

Problem 1. (1 point each) List five fixed costs for implementing a new ERP system. O Purchase O Software O Hardware Implementation O Training O Integration and testing O Customization O Data conversion O Consultants O Changes in employee responsibilities/tasks O New IT Staff O Interruption of main processes Delayed ROI Resistance to change, time to adapt

O O

Problem 2. (10 points) A computer manufacturer is following a make-to-stock MPC environment, and estimates that the demand for their mouse model will increase by 850,000 units. They are aiming for a 100% customer service level, and they must decide whether to produce the items for the extra demand internally for $12 each, or outsource their production for $15 per mouse. Management estimates that expanding the current production floor and purchasing the necessary equipment will cost $3 million. Should they outsource or expand the capacity?

We need to find the break-even point: 12 + 3,000,000 = 15 3 = 3,000,000 = 1,000,000

The manufacturer will produce 850,000 units, which is less than the break-even point. Therefore, it does not worth making the investment for the capacity expansion. They should outsource the production.

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EIN 4333

Spring 2013

Problem 3. (1 point each) Please mark the order decoupling point for each environment listed in the table below: Raw material inventory Work-in-process / Components Finished goods

Suppliers (a) Make-to-stock (b) Engineer-to-order (c) Make-to-order (d) Assemble-to-order (e) What is make-to-knowledge? How is it useful?

It replaced forecasts with knowledge of customer requirements. Information channels (information sharing, etc.) enhance knowledge on customers inventory, requirements, and plans. It helps reduce the uncertainty in demand and consequently the average inventory level.

Problem 4. (10 points each) Figure 4.1 gives the daily demand distribution for LCD televisions at an electronics retail store. The manager of this retail store follows a (, ) inventory replenishment model with = 8, and = 10. She is able to follow the inventory level for every item sold in the store continuously due to their new fantastic ERP system, which is integrated with the system of their local warehouse. The store ERP system automatically sends an order to the local warehouse when an order is due based on their replenishment model. The lead time from the local warehouse is 1 day: any order placed by the end of day 1 will be received (and ready to be sold) by the beginning of day 3. (a) What is the service level for LCD televisions with the current inventory replenishment model? 100 ) ()( ) = 100 (

= 100

100 (0.03)(11 10) + (0.01)(12 10) = 100 (12.5)(0.5) = . % 8

(b) What is the probability of stocking out? We will stock out if daily demand is 11 or 12 units: 0.03 + 0.01 = 0.04 4%

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Exam 1
0.3 Probability of demand occurence 0.25 0.2 0.15 0.1 0.05 0

EIN 4333

Spring 2013

10

11

12

Probability of demand 0.01 0.03 0.08 0.13 0.25 0.25 0.13 0.08 0.03 0.01 Daily Demand (D)

Figure 4. 1 Daily demand distribution

Problem 5. (3 points each) Historical demand and forecasts for a product is given in Table 5.1:
Table 5.1. Historical demand and forecast data

Month January February March April May June

Actual Demand 12 11 15 12 16 15

Forecast 14 15 12 14 14 13

(a) Using a simple three-month moving average, find the July forecast. 12 + 16 + 15 = 14.3 ~ 15 3 (b) Using a weighted moving average with weights of 0.60, 0.30, and 0.10, find the July forecast. (0.6)(15) + (0.3)(16) + (0.1)12 = 9 + 4.8 + 1.2 = 15

(c) Using a single exponential smoothing with = 0.2, find the July forecast. (0.2)(15) + (0.8)(13) = 3 + 10.4 = 13.4 ~ 14

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EIN 4333

Spring 2013

(d) Considering forecasting methods given in parts (a), (b), and (c), how can we alter each one of them to make the forecast result more stable (i.e., less sensitive to recent changes in the market)? i. part (a): Use more than 3 months ii. part (b): Reduce the weight on the last month (e.g., 0.5 instead of 0.6) iii. part (c): Use a smaller -value (e) Calculate MAD for the forecasts from January through June.

1 ) ( = | | = =

|12 14| + |11 15| + |15 12| + |12 14| + |16 14| + |15 13| 6 2 + 4 + 3 + 2 + 2 + 2 15 = = 2.5 6 6

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EIN 4333

Spring 2013

Problem 6. (10 points each) Parasol Systems sells motherboards for personal computers. For quantities up through 50, the firm charges $50 per board; for quantities between 51 and 100, it charges $45 for each board purchased beyond 50; and it charges $40 for additional quantities over 100. A large communications firm expects to require 500 of these motherboards for the next year. Order setup costs are $30, and holding costs are based on a 25 percent annual interest rate. (a) What should be the size of each order?

This is the incremental discount model. 50 0 50 50 0 50 = )( 2500 + ( 50)45 50 < 100 = 250 + 45 50 < 100 750 + 40 100 < 4750 + ( 100)40 100 <
= 50 =

2(30)(500) = = 48.9 49 (0.25)(50)

750 + 40

+ 45

2(30 + 250)(500) = = 157 (0.25)(45) 2(30 + 750)(500) = = 279 (0.25)(40)

( ) = (500)(50) + (30) ( ) = (500)

and are realizable, whereas is not.

Order size: =

750 500 750 279 + 40 + (30) + + 40 (0.25) = , . 279 279 279 2

500 49 + 50(0.25) = 25,612.37 49 2

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Spring 2013

(b) Assume that the discount on the purchase cost is now applied for all units purchased in a single order, not only the additional quantities. What is the optimal order size?

2(30)(500) = = 48.9 49 (0.25)(50)

50 0 50 = )( 45 50 < 100 40 100 <

2(30)(500) = 54.7 55 = (0.25)(40)

2(30)(500) = = 51.6 52 (0.25)(45)

(52) = (500)(45) + (30)

The largest realizable is = 52. We need to compare it with the greater break points (i.e., = 100). 500 52 + (0.25)(45) = 23,080.96 52 2 500 100 + (0.25)(40) = 20,650 100 2

(100) = (500)(40) + (30)

The optimal order size in all-units model is the break point = .

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EIN 4333

Spring 2013

Problem 7. (10+10+5 points) The Seldom Seen Ranch in Muckinfut, Texas, is in the process of developing an inventory control system for purchasing hay that will cope with Texas-size uncertainty. Seldom Seen foreman Horace Cints prepared the following information on Seldon Seens hay use: Average demand during lead time = 1,000 bales Lead time = 1 month Economic order quantity = 2,500 bales Forecast interval = 1 month Mean absolute deviation of forecast error = 40 bales Desired probability of stocking out = 0.10 (a) How much safety stock will be required?

= (1.25) = (40)(1.25) = 50 = (1.282)(50) 64 bales


= + = 1,000 + 64 = 1,064

The z-value for a 0.10 probability of stocking out is 1.282 (from the table):

(b) What is the reorder point?

(c) What is the customer service level for this policy? ) (value for = 1.282 0.05

= 100

100 ( ))( 100 = 100 (1.25)(40)(0.05) = . % 2,500

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