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# Question 2

## A) We are able to get important results in any area of operations

management by using the calculations of economic order quantity (EOQ).
These are essential in inventory control and there are several assumptions
that are to be considered:
Demand is known and consistent over a period of time
All cost are known and does not vary
!o shortages allowed
There are also other assumptions that implicit the model:
The purchase price remain constant even in bulk order
The reorder price remain constant with the "uantity ordered
A single delivery is made with any "uantity ordered. !o limit in
shipment.
#eplenishment is instant
The assumptions may seem unrealistic in day to day operations as it is \$ust a
simplification of reality and aim to provide useful model results rather than
e%act representations of actual circumstances. The results are good
appro%imation and can be use as a useful guideline.
Figure 2.1 Basic stock cycle
&tock
'evel
D
Q
T
Demand (D): () units weekly
() * (+ , +-)) units yearly
.nit /ost (./): 0() per unit
#eorder /ost (#/): 0+))
1olding /ost (1/): +(2 * 0()3unit , 04+.()
.sing the formulas below5 we substitute the information above to find our
6conomic order "uantity:
Economic order quantity Qo =
HC
D RC 2
=
50 . 12 \$
2600 200 \$ 2
= +77.88 units
, +77 units
The recommended economic order "uantity for the company to minimi9e cost is
+77 units of game console.
Optimal cycle length = To =
D
Qo
=
2600
288
, ).44)7 years
, ).44)7 * :-( days , 8).88 days
The optimal time between orders is ).44)7 years or 8).88 days.
Optimal variale cost per unit time = !"o = #" Qo
, 04+.() +77 units
, 0:5-))
The optimal variable cost per unit time is \$3,600
Optimal total cost T"o = \$" % & !"o
, 0() +-)) ; 0:5-))
, 04::5-))
The total cost for ordering +77 game consoles is \$133,600
/ompanies often do not meet the optimal order "uantity. <n this case the supplier
can only make a delivery for () units therefore the variable will be:
=/ ,
Q
D RC
;
2
Q HC
,
50
2600 200
;
2
50 50 . 12
, 04)58)) ; 0:4+.()
, 04)5>4+.()
?or orders of () units per delivery (Q)5 the annual inventory cost will be
04)5>4+.()
T/ , ./ % D; =/
, 0() % +-)) ; 04)5>4+.()
, \$140,712.50
The total cost for ordering () game consoles per delivery is \$140,712.50. This
amount is more than when delivering +77 units of game consoles therefore it is
not feasible. We would suggest that @&/ 1oldings sticks to the optimal order
"uantity of +77 units.
#/ ,
D
HC Q

2
2
,
2600 2
50 . 12 50
2

, 0-.))
.nless the reorder cost (#/) drops to 0-.)) which is largely impossible then the
delivery of () units of game console would be feasible.
B)Assume the lead time (LT) is 9ero. This means as soon as we place an order5
the materials arrive. #ealistically there are bound to be delays such as:
/onsolidation of orders
Areparation of documents
Areparation of goods
Transportation of goods
With this5 we have to define a reorder level (#B') to replenish the stock taking
into consideration the delay for the stock to arrive while having enough stock till
the ne%t shipment.
'raph2.2 "ycle (ength
#eorder level , 'ead time demand , 'ead time C Demand per unit time
#B' , 'T C D
This formula is applicable if the lead time is shorter than the cycle length. Dut if
the cycle length is longer than the lead time we use:
#B' , 'T C D E n C Fo
With the lead between n C To and (n ; 4) C To5 there are n order(s) outstanding
when it is time to place the ne%t order5 so the reorder level is 'T C D E n C Fo.
Where n is the number of complete cycle between lead time.
Optimal cycle length )To* =
D
Qo
=
2600
288
, ).44)7 years
, ).44)7 * (+ weeks , (.7 weeks
The optimal time between orders is ).44)7 years or (.7 weeks.
S
t
o
c
k

l
e
v
e
l
Time
'T , 8 weeks
T , (.7 weeks T , (.7 weeks
days
Alace order A
Alace order A
Brder A arrives
Brder A arrives
Brder D arrives
Brder D arrives
T , (.7 weeks T , (.7 weeks
'T , 8 weeks
Demand (D): () units weekly

#eorder 'evel (#B') , 'T % D
, 8 % ()
, +))
The reorder level of the GHcube game consoles is 200 units. This means that
when the stock falls to +)) units5 it is time to place an order for +77 units as
previously calculated.
n cycle:
8 . 5
20
, :.88
,: complete cycles
#B' , 'T C D E n C Fo
, +) % () E : % +77
, 4:-
As soon as the stock level reaches 136 units5 @&/ 1olding should make an
order of +77 units.
) <n reality5 there is always uncertainty in inventory management. The
value is unknown but follows a known probability distribution. <t is almost
impossible to know the e%act demand every week and the problems are
classified into :
\$nkno+n Ewe have complete ignorance of the situation and any analysis
is difficult
,no+n Ewe know the parameters and values and can use deterministic
models
\$ncertain Ewe have probability distributions for the variables and can use
probabilistic or stochastic models
/ompanies usually hold additional stock than they anticipate distributing. These
stocks are called safety stocks. &afety stocks are usually use when companies
encounter delays or when there is a sudden surge in demand.
&afety &tock (&&): - . LT
Tale 2.1 below shows the number of standard deviations (!) from the mean that
correspond to the specified service level:
Tale 2.1 - tale
Dase on Table +.4 the value of for a I)2 service level is 4.+7.
&tandard deviation (J): 4) units a week.
&afety &tock (&&) , - . LT
, 4.+7 % 4) % 4
, +(.- units
, +- units
.sing deterministic model5 we defined the reorder level to be:
#B' , 'T D ; &&
, 'T D ; K LT
, 8 % () ; +-
, ++- units
?or a service level of I)2 @&/ 1olding should hold a safety stock of 226 units
of game consoles
<f the service level is increased to I72 the value of based on Table +.4 will be
+.)(. Therefore:
&afety &tock (&&) , K LT
, +.)( % 4) % 4
, 84 units
, 84 units
#B' , 'T D ; &&
, 8 % () ; 84
, +84 units
?or a service level of I72 @&/ 1olding should hold a safety stock of 241 units
of game consoles.
Difference between service level I)2 and I72 , +84H++-
, 4( units
Additional holding cost for 4( units , +(2 % 0() % 4( units
, 047>.()
Dy having a service level of I72 instead to I)25 the company holds an
units was calculated to be \$1"7.50.
#) Demand: ()units
&tandard deviation Demand (J): 4) units
&tandard deviation 'ead Time (J'T): ).( weeks
The lead time demand has a mean of 'T % D , 8 % () ,+)) units and a standard
deviation of :
J'TD , 'T C JL ; DL C J'TL
, 8 C 4)L ; ()L C ).(L
, :+.)+ .nits
, :+ units
?or a !ormal distribution5 I)2 service level corresponds5 according to Tale 2.15
, 4.+7.
&afety stock (&&): % J'TD , 4.+7 % :+
, 8).I-
, 84 units
#eorder level (#B') , 'T % D ; && , 8 % (); 84units
, +84 units
6conomic order "uantity Fo =
HC
D RC 2
, +77 units
the normally distributed delivery lead time with a mean of 8 weeks and standard
deviation of ).( weeks5 to achieve a service level of I)25 @&/ 1oldings should
have a safety stock of 84 game console units and a reorder level of +84 units. <n
Aart (/) in reorder level for a service level of I)2 is ++-. The difference is 15
game console units.
Difference between standard deviation of ).( weeks at service level I)2
, +84H++-
, 4( units
E) Aeriodic review methods allow for uncertainty by placing orders of varying si9e
at fi%ed time intervals.
Demand (D): () units weekly.
&tandard deviation Demand (JD): 4) units weekly.
Brder interval (T): + weeks
&ervice level of I)2 ! , 4.+7
With periodic review method5 stocks are reviewed at a specified time. <n this
case5 it is a every + weeks. ?or a !ormal distribution5 I)2 service level
corresponds5 according to Tale 2.15 , 4.+7.
&afety stock , standard deviation of demand over T ; 'T
&& , K T LT +
, 4.+7 % 4) % 4 2 +
,:4.:(
,:4 units
The safety stock buffer is :4 units of game console in order to meet customer
service level of I)2.
Target &tock level , D C (T;'T) ; &&
, () C (+;8) ; :4 units
, ::4 .nits
The target stock level for a customer service level of I)2 is ::4 units.