Chapter

12

Inventory Management

DISCUSSION QUESTIONS
1. The short answer is that higher inventories do not provide an advantage in any of the nine
competitive priority categories. The important point is that firms must have the “right
amount” of inventory to meet their competitive priorities.
The only relevant costs considered in this chapter are ordering costs, holding costs,
and stockout costs. In the economic order quantity (EOQ) model, costs of placing
replenishment orders tradeoff against the costs of holding inventory. Under the
assumptions of the EOQ, average inventory is one-half of the order quantity. The number
of orders placed per year varies inversely with order quantity. When we consider
stockout costs, an additional inventory (safety stock), is held to trade-off costs of poor
customer service or costs for expediting shipments from unreliable suppliers.
In the lean systems chapter, we see order quantities (lot sizes) that are much smaller
than the “ideal” suggested by the EOQ model. As a result, lean systems average
inventory is also much lower. Are there some other relevant costs of holding inventory
that we have not considered in the EOQ model? If there are, a firm that ignores these
costs will make the wrong inventory decisions. These wrong decisions will make the firm
less competitive.
Let’s examine the relationships between inventory and the nine competitive priorities
discussed in the operations strategy chapter. We compare competitors H and L. They are
similar in all respects except H maintains much higher inventory than does L.
1) Low-cost operations. Costs include materials, scrap, labor, and equipment capacity
that are wasted when products are defective. When a process drifts out of control,
competitor H’s large lot sizes tend to result in large quantities of defectives. The EOQ
does not consider the cost of defectives, and erroneously assumes that setup costs are
constant. Small lots cause frequent setups, but the cost per setup decreases due to the
learning curve. Competitor L will enjoy competitive advantages with lower setup,
materials, labor, equipment, and inventory holding costs.
2) Top quality. Superior features, durability, safety, and convenience result from
improved designs. High inventories force competitor H to choose between scrapping
obsolete designs or delaying introduction of product improvements until the old
inventory is consumed. In either case, L gains a competitive advantage.
3) Consistent quality. Consistency in conforming to design specifications requires
consistency in supplied materials, setups, and processes. Small lots made frequently
tend to increase consistency. Again, advantage goes to L.
4) Delivery speed. Large lots take longer to produce than small lots. A customer will
wait less time for competitor L to set up and produce orders made in small batches.

Inventory Management • CHAPTER 12 • 307

5) On-time delivery. Contrary to expectations, large inventories do not equate to ontime delivery. It’s more like, lots of inventory equals lots of chaos. Big lots make big
scheduling problems. Big lots get dropped, mishandled, and pilfered. Most lean
companies experience dramatic improvement in on-time delivery.
6) Development speed. This response is similar to that given for high-performance
design. Low inventories result in getting new designs to the market more quickly.
7) Customization. Lean companies usually don’t claim an advantage in customization.
However, large inventories provide no advantage with regard to customization either.
It remains unlikely that a customized product will be found in inventory, no matter
how large.
8) Variety. Mass customizers compete on service or product variety. They will keep
products at raw material or component levels until a customer orders a specific
configuration. Inventories are at as low a level as possible.
9) Volume flexibility. Lean (low inventory) companies tend to produce the same
quantity of every product every day, but they claim considerable volume flexibility
from month to month. On the other hand, a large finished goods inventory can be
used to absorb volume fluctuations.
In summary, a case can be made that several competitive priorities are not
considered in the EOQ model. It is sometimes difficult to place a dollar value on
these competitive advantages, but the advantages invariably go to the low-inventory,
small lot-size firm. So if the EQO is too large, what is the “ideal” lot size? According
to the lean philosophy, the “ideal” lot size is one.
2. Reducing cycle inventories has an effect on practically every functional area. Although
responses will vary, and sometimes be quite insightful, the following list contains some
standard answers:
Marketing—Reducing cycle inventories implies that there is less inventory on hand,
which could increase stockouts if the inventories are not managed properly.
Finance—Smaller-cycle inventories implies that there is less capital tied up in
inventory, thereby reducing the pressure for short-term operating capital and allowing for
alternative investment options.
Operations—Reducing cycle inventories implies that order quantities are to be
reduced. Order times and costs must be reduced to facilitate that move. Smaller order
quantities enable a shift toward a lean system and enhance a uniform flow of materials
through the production process.
3. Organizations will never get to the point where inventories are unneeded. Inventories
provide many functions and should be managed, not eliminated. It is impossible to
eliminate uncertainties in the provision of products or services. In addition, unless
materials can be transported instantaneously, there will always be pipeline inventories.
Cycle inventories will exist unless we universally get to the point where production of
single units is feasible.

308 • PART 3 • Managing Value Chains

PROBLEMS
1. A part
a. Average cycle inventory

=Q 2
= 1000 2 = 500 units
= (500 units) ($50+$60)
= $55,000

Value of cycle inventory
b. Pipeline inventory
Value of the pipeline inventory

= dL
[(3800 units/year)/(50wks/yr)](6 weeks)
= 456 units
= (456 units)($50+$30)
= $36,480

2. Prince Electronics
a. Value of each DC’s pipeline inventory
= (75 units/wk)(2 wk)($350/unit)
= $52,500
b. Total inventory

= cycle + safety + pipeline
= 5[(400/2) + (2*75) + (2*75)]
= 2,500 units

3. Lockwood Industries
First we rank the items from top to bottom on the basis of their dollar usage. Then we
partition them into classes. The analysis was done using OM Explorer Tutor12.2—ABC
Analysis.
Part # Description
4
7
5
2
6
8
3
1
Total

Qty Used/Year
44,000
70,000
900
120,000
350
200
100
1,200

Value Dollar Usage
$1.00
$44,000
$0.30
$21,000
$4.50
$4,050
$0.03
$3,600
$0.90
$315
$1.50
$300
$0.45
$45
$0.01
$12
$73,322

Pct of Total
60.0%
28.6%
5.5%
4.9%
0.4%
0.4%
0.1%
0.0%

Cumulative % Cumulative %
of Dollar Value
of Items Class
60.0%
12.5%
A
88.7%
25.0%
A
94.2%
37.5%
B
99.1%
50.0%
B
99.5%
62.5%
C
99.9%
75.0%
C
100.0%
87.5%
C
100.0%
100.0%
C

Class A items account for 88. Average cycle inventory Value of cycle inventory =Q 2 = 250/2 = 125 units = (125 units)($450) = $56.020 L104 S104 X205 X104 2. Computing the annual usage value for each item and rank ordering them highest to lowest.075 Cumulative Value ($) 9.765 A104 L205 3. 000 units yr ) ⎫ = dL = ⎨ ⎬ ( 3 wk ) 50 wk yr ⎩ ⎭ = 240 units Value of pipeline inventory = (240 units)($150 + $300/2) = $72.232 28. For example.603 1.” For the items sampled. Pipeline inventory 5.985 22.005 1. particularly close control is needed for items 4 and 7. rather than 80%.220 3. Stock-Rite Inc. 4. we get: Item D205 U404 Annual Value ($) 9. Nonetheless.690 15.250 ⎧ ( 4. Terminator Inc.604 1.000 b.025 25. the important finding is that ABC analysis did find the “significant few.690 6.7% of the total.732 A: 55% B: 22% C: 23% .035 18.Inventory Management • CHAPTER 12 • 309 The dollar usage percentages don’t exactly match the predictions of ABC analysis.629 27.500 24. a.

000 = 1000 tapes H $0. Optimal interval between orders d. 25% of the items) in A class accounting for 55% of the total value. Inc.e. Dot Com a. Yellow Press. EOQ = 2 ( 32. rather than 80%.50 2 DS 2 ( 4. The dollar usage percentages don’t exactly match the predictions of ABC analysis.64 or 46 rolls $120 roll-year H b. 000 )( $10 ) 2 DS = = 400 books H $4 b. a. a.000)/400 = 80 orders = 300/80 = 3.75 days = (5 days)(32. For example. 6.000/300) = 533 books .50 ) EOQ = = = 1. or every 4. Class A items account for only 55% of the total. Demand during lead time = dL = (32. 000. Economic order quantity D = 2500 rolls Price = $800 roll H = 15% ( $800 ) = $120 roll-year S = $50 EOQ = 2 DS 2 ( 2500 rolls year )( $50 ) = = 2083. Nonetheless.310 • PART 3 • Managing Value Chains One classification might be to group the top two items (i. The next two items would be classified as B and the last four as C. 000 = = 0.0184 year.6 days D 2500 if there are 250 working days in a year 7.” For the items sampled.2083 years or 2. Optimal number of orders/year c.800 )( $12.33 = 45. the important finding is that ABC analysis did find the “significant few. d = 400 tapes/month D = 4800 tapes/year H = $0.5 months D 4.12 b.12 S = $12. Time between orders Q 46 = = 0. Babble Inc. particularly close inventory management is needed for items D205 and U404.. Time between orders Q 1.800 8.

e.159 2 ( 4. a. z = 084 .84 * 26 = 21.159 Time between orders.69 days = (4 days)(30. Because inventory position remains above 292.08547 years = 4. 000 )( $10 ) 2 DS = = 775 units H $1 Optimal number of orders Optimal interval between orders Demand during lead time = dL Reorder point = dL + safety stock Inventory position = OH + SR – BO = (30.000)/(775) = 38. Reorder point = dL + safety stock f. . f. it is not yet time to place an order.7 or 39 = (300)/(39) = 7.70 ) = $3. Leaky Pipe Inc. Economic order quantity d = 90 week D = 4. σ L = σ t L = 15 3 = 26 = 25. 2 ( 30. EOQ = b. Sam’s Cat Hotel a.70 H = 27% ( $11. Inventory position = OH + SR – BO = 533 + 0 = 533 books = 533 + 400 – 0 = 933 books 9. 000 = 400 bags H 3. Initial inventory position = OH + SR – BO = 320 + 0 – 0 320 – 10 = 310. in weeks Q 400 = = 0.82 or about 22 bags R = 270 + 22 = 292 c. .Inventory Management • CHAPTER 12 • 311 e.98 or 26 Safety stock = 0. c.44 weeks D 4680 EOQ = b. 680 S = $54 Price = $11. Reorder point.000/300) = 400 units = 400 + 0 = 400 units = 400 +775 – 0 = 1175 units 10. 680 )( 54 ) 2 DS = = 160. R R = demand during protection interval + safety stock Demand during protection interval = dL = 90 * 3 = 270 bags Safety stock = zσ L When the desired cycle-service level is 80%. d.

120 3. 680 S= $54 Q 400 = $631.159 + 54 2 327 C327 = $516.80 Annual ordering cost D 4. which is $31.60.6 or 327 bags H 3. Annual holding cost Q 500 (27% )($11.70) H= 2 2 = $789. these two costs are equal.00 – $1. revisited a.50 + $515.73 400 3. the annual holding cost is larger than the ordering cost. 11. Annual holding cost Q 400 (27% )($11. Sam’s Cat Hotel. 053 We can see clearly now that the cost penalty of Sam’s difficulty in foreseeing demand for kitty litter is $21. the EOQ would be incorrectly calculated (from problem 10) as 400 bags: The total cost.44 At the EOQ.031. working with the actual demand.120 3.19.159 + 54 2 400 = $631.312 • PART 3 • Managing Value Chains d. the correct EOQ is: D = (60 units/wk)(52 wk/yr) = 3.295. If the demand is only 60 bags per week.80 + $421. When Q = 500 .27 ($1. e.120 )( 54 ) 2 DS = = 326.263.159 If the demand is incorrectly estimated at 90 bags.44 = $1.73).120 bags EOQ = 2 ( 3.59 less than when order quantity is 500 bags.053. 680 S= $54 Q 500 = $505. 031. .23 C327 = $1.75 Annual ordering cost D 4.20 C400 = C400 C400 = $1. Total costs are $789.70) H= 2 2 = $631.80 Total costs at EOQ: = $1.75 + $505. is: Q D C= H+ S 2 Q C327 = 327 3. therefore Q is too large.

159 + 6 2 109 = $172.25 C327 = C327 C327 = $573. If S = $6.83. 12.33. EOQ = 2 ( 50.700 + 105 – 0 = 2.9 or 109 bags H 3.120 3.50 + $57.33 * 45 = 104.17 + $171.74 If the reduced ordering cost continues to be unseen.74 C= C109 C109 C109 = $343.85 or 105 gizmos R = 2. 000 )( 35 ) 2 DS = = 1. Reorder point R = demand during protection interval + safety stock – backorders Safety stock = zσ L When the desired cycle-service level is 99%. the cost penalty for not updating the EOQ is (573.120 = 3. Petromax Enterprises a.323 units H 2 . the correct EOQ is: EOQ = 2 ( 3. A Q system (also known as a reorder point system) gizmos d = 300 week σ t = 15 gizmos a. Average demand during the protection interval: gizmos (9 weeks) = 2700 gizmos dL = 300 week c. working with the actual ordering cost. z = 2.159 + 6 2 327 = $516. Safety stock = 2. is Q D H+ S Q 2 109 3. Standard deviation of demand during the protection interval: σ L = σt L σ L = 15 9 = 45 gizmos b.159 The total cost.805 13.Inventory Management • CHAPTER 12 • 313 b.91 327 3.120 )( 6 ) 2 DS = = 108.74 – 343.91) = $229. and D = 60 × 52 = 3120 .

Nationwide Auto Parts a.54 or 89 dohickies σt = 15. given: L = 2 weeks d = 53 whatchamacallits week σ t = 5 whatchamacallits R = 120 whatchamacallits Safety stock = R – dL = 120 – (53*2) = 14 whatchamacallits Safety stock = zσ L = 14 whatchamacallits σ L = σ t L = 5 2 = 7. Safety stock = Zσ L = Z σ t L = (1.” Find cycle-service level.33(85) = 198 dohickies Safety stock required for one-week protection interval σ L = σ t L = 85 dohickies 85 = 38 dohickies 5 Safety stock = zσ t = 2. Order quantity = Target inventory – IP = 1.29 )(125 ) Reorder point ( 3 ) = 279.29 or 280 units = average lead time demand + safety stock = (3)(50. Find the safety stock reduction when lead time is reduced from five weeks to one week.018 c.314 • PART 3 • Managing Value Chains ( ) b.96)(60) = 1.33).018 – 350 = 668 units presuming no SR or BO . Target inventory = d(P+L)+zσP+L = 900 + (1. 16.278 units 14.33(38) = 88. A two-bin system. with the normal level in the second bin being the reorder point R. “The two-bin system is really a Q system.07 or 7 whatchamacallits z(7) = 14 z=2 When z = 2. Safety stock required for five-week protection interval Safety stock = zσ L = 2.72%. given: Standard deviation of demand during the (five-week) protection interval is 85 dohickies. Desired cycle service level is 99% (therefore z = 2. the cycle-service level is 97.000/50) + 278 = 3. A perpetual system (also known as a continuous review system). Protection interval (PI) = P + L = 6 +3 = 9 weeks Average demand during PI = 9 (100) = 900 units Standard deviation during PI = 9 • (20) = 60 units b.

The amount to reorder is T – IP = 710 – 310 = 400. The lead time is 3 weeks × 6 days per week = 18 days.50)) = 2.5 ) = (2.51 or 35 bags T = Average demand during the protection interval + Safety stock T = (15*45) + 35 = 710 b. IP = 310. Referring to Problem 10.98 or 98%. When the demand rate is 15 per day. the Q system required a safety stock of 22 bags to achieve an 80% cycle-service level. inventory position.67 or about 27 days.08) = 34. 000 )( 50 ) 2 DS = = 633 units H 2.33% = (2. the P system requires a safety stock that is larger by (35 – 22) 13 bags.50 a. then the protection interval (P + L) = (27 + 18) = 45 days. H = ((0. Safety stock will now be % reduction in safety stock d. A Successful Product Annual Demand.Inventory Management • CHAPTER 12 • 315 17. given: L = 2 weeks P = 1 week d(P + L) = 218 gadgets σ P + L = 40 gadgets T = 300 gadgets T = Average demand during protection interval + Safety stock T = 218 + z(40) = 300 z = (300 – 218)/40 = 2.05. cycle-service level is 97. the EOQ is 400 bags. the average time between orders is (400/15) = 26. c. If the review period is set equal to the EOQs average time between orders (27 days). σ P + L = 6124 Safety stock = zσ P + L = 0. A P system (also known as a periodic review system). 18.33)(8) (4) = 37.33)(16) (2) = 52. Safety stock will be % reduction in safety stock = (2. Therefore. Sam’s Cat Hotel with a P system a. 45 = 4108 .28 or 38 units = (75 – 38)/75 = 49. For an 80% cycle-service level z = 084 .05 When z = 2. σ P+ L = σ t P + L . Optimal ordering quantity = ( b. From Problem 10. Find cycle-service level. In Problem 10.33% 19.33)(16) (4) = 74.72 or 53 units = (75 – 53)/75 = 29. Safety stock = Zσ L = Z σ t L 2 (10.56 or 75 units c.20)(12.84(41. .000 units. D = (200)(50) = 10.

000 P is rounded to two weeks. (329 – 233) = 96 more units of safety stock are needed.4 or 894 units H 2 Number of orders per year = D Q = 20. Periodic review system a. z = 1.4 or 894 units H 2 Time between orders (TBO) = Q/D = 894/20.3244 weeks D 20.0447 years × 52 weeks year = 2.040 to 1. (100) 2 = 232. a new order is not placed. IP drops from 1.000 S= $40 = $894. Therefore Safety stock = zσ P + L σ P+ L = σ t P + L σ P + L = 100 2 + 2 = 200 units Safety stock = 1. Continuous review system. Annual holding cost of cycle inventory Q 894 H= ( 2 ) = $894.00 2 2 ii.025 units. z = 1. with a Q system the safety stock is 233 units. Because this level is above the reorder point (1. In Problem 20. Weekly demand = 20. P= b. a. T = Average demand during the protection interval + Safety stock T = (385 * 4) + 329 = 1. as R = dL + Safety stock = 385(2) + 233 = 1003 units c.000 = 0. From Problem 20.000/894 = 22. Economic order quantity.4 orders per year.6 or 233 units Safety stock = zσ L = zσ t L = 1645 Now solve for R. 000 )( 40 ) 2 DS = = 894.0447 years = 2. 000 )( 40 ) 2 DS = = 894. Annual ordering cost D 20. 21.003).645(200) = 329 units.645 . .869 units c. EOQ 894 = = 0. EOQ = 2 ( 2.000/52 = 385 units For a 95% cycle-service level.316 • PART 3 • Managing Value Chains 20. For a 95% cycle-service level.85 Q 894 d. With the 15-unit withdrawal.025 > 1. Therefore. EOQ = 2 ( 20. i.32 weeks b.645.

and the higher reorder point increases safety stock by 32 units.175. EOQ = 160 EOQ 160 P= = = 2.175(17) = 20 units c. Reorder point R = dL + Safety stock = 64(2) + 20 = 148 units d.25/box EOQ = 2 ( 52. For an 88% cycle-service level. When cycle-service level is 88%. Wood County Hospital a. Periodic review system a. or 27 units σ P + L = 12 3 + 2 = 268 Safety stock = 1.175(27) = 32 units T = average demand during the protection interval + Safety stock T = (64 * 5) + 32 = 352 units 24. z = 1. 5 weeks d 64 week P is rounded to three weeks. D = (1000 boxes/wk)(52 wk/yr) = 52.Inventory Management • CHAPTER 12 • 317 22. If Q = 200 and R = 180.25 . Continuous review system a. Safety stock. The larger order quantity increases average cycle stock by 20 units.000 boxes H = (0.1 or 545 boxes H $5. σ L = σ t L = 12 2 = 17 units Safety stock = zσ L = 1.175. average inventory investment is higher than necessary to achieve an 88% cycle-service level.l5)($35/box)=$5. 23. 000 )( $15 ) 2 DS = = 545. b. Economic order quantity 2 DS 2(64)(52)(50) EOQ = = = 160 units H 13 b. Therefore Safety stock = zσ P + L σ P+ L = σ t P + L . z = 1. From problem 22.

25 + $15.82 = $367.00 = $3. given: P = 2 weeks L = 2 weeks Safety stock = zσ P + L σ P+ L = σ t P + L σ P + L = 100 2 + 2 = 200 units Safety stock = 1.00 = $2. 000 = $5.861. reason is that the optimal value of P was not used here. Therefore.16 – $2. In a periodic review system.861.88. or 265 boxes R = dL + Safety stock = 1000(2) + 265 = 2. 000 = $5. The .82 2 545 C= C900 C545 The savings would be $3.34.16 2 900 545 52. σ L = σt L σ L = 100 2 = 141.318 • PART 3 • Managing Value Chains Q D H+ S 2 Q 900 52. b.88(141) = 265. z = 1. find target inventory T.08. Notice that the total cost for the Q system is much less than that of the P system. 229. .25 + $15.265 boxes c.4.88(200) = 376 units T = Average demand during the protection interval + Safety stock T = 1000(2 + 2) + 376 T = 4376 units The screen shot below is taken from OM Explorer Solver—Inventory Systems.229. When the cycle-service level is 97%. or 141 boxes Safety stock = zσ L = 1. The optimal value is P = 055 weeks.

0 weeks D 2000 When cycle-service level is 90%.00 .94 = 331 b.32 Average Demand During Protection Interval Target Inventory Level (T) Annual Cost 25.614.29)(3) 4 = 7. Periodic Review System 2 DS 2(2000)(40) EOQ = = = 17888 .28. Weekly demand is (2. Continuous review system dL = 40 × 4 = 160 SS = zσ L = (1.68 or 8 R = 160 + 8 = 168 200 376 4000 4376 $7. z = 1. Golf specialty wholesaler a. Enter manually Safety Stock Reorder Point Annual Cost 266 Standard Deviation of Demand During Protection Interval 2266 Safety Stock $4.258.00 Weeks .29 ( 3) 8 = 320 + 10.0895 years = 4. or about 179 1-irons H 5 P= EOQ 179 = = 0.000 units/yr)/(50 wk/yr) = 40 units/wk L = 4 weeks T = d ( P + L ) + zσ P + L P + L = 40 ( 8 ) + 1.475 or 4.88 Time Between Reviews (P) 2.Inventory Management • CHAPTER 12 • 319 Results Solver Inventory Systems Continuous Review (Q) System z Periodic Review (P) System 1.

6% 114 120 99.0% 93.0% 100.0% 81.6% 96. It shows the results of 500 trials.6% 81.0% Demand During Protection Interval 151 120% 140 Frequency 100 96. the value of R must yield a service level that meets or exceeds the desired value of 95%. The high level of safety stock is necessary because of the high variance in the demand during protection interval distribution and the high variance in lead time.6% 100. Since the reorder point is 71.6% 39. which will yield a cycle service level of 96.4% 99.0% 100.0% 80 60 80% 69.0% 100. b.6% 100. Office Supply Shop The screen shot below is taken from OM Explorer Solver – Demand During Protection Interval Simulator. Demand During Protection Interval Distribution Bin Back to Inputs Upper Bound 17 29 41 53 65 77 89 101 113 125 Demand Frequency 11 23 35 47 59 71 83 95 107 More Total 83 114 151 57 63 14 16 2 0 0 500 Average Demand During Protection Interval Cumulative Percentage 35 16. That value of R is 71 pens.320 • PART 3 • Managing Value Chains 26.6% 14 20% 16 2 0 0 95 107 More 0 11 23 35 47 59 71 83 Cumulative Percentage 160 0% Demand Frequency Cumulative Percentage a.6% 83 57 39. Given the simulation. The average demand during the protection interval is 35 pens.4%.0% 100.4% 93. the safety stock must be 71 – 35 = 36 pens.4% 100% 60% 63 40% 40 20 16.4% 69. .

2% 17.4% 39. Grocery store. the cycle-service level for T = 150 would be 97. Floral shop a.4% 40% 40 14 20 0 100% 85.0% 2 3. This result comes from OM Explorer Solver – Demand During Protection Interval Simulator.0% 100.0% 100 Frequency 96.4% 100. The target level (T) should be 150 tubes of Happy Breath Toothpaste. a. 28.8%.0% 100. Cumulative Percentage Using OM Explorer once again. .4% 100.Inventory Management • CHAPTER 12 • 321 27. Eliminating the variance in supply lead times will significantly increase the cycle service level of the inventory.2% 50 70 0.0% 100.0% 80% 80 71 62. The EOQ for the continuous review system would be as follows.4% 90 110 130 150 170 190 20% 0 0 210 More Cumulative Percentage 140 0% Demand Frequency b.4% 62.4% 85. Demand During Protection Interval Distribution Bin Back to Inputs Upper Bound 60 80 100 120 140 160 180 200 220 240 Demand Frequency 50 70 90 110 130 150 170 190 210 More Total 2 14 71 110 115 113 57 18 0 0 500 Average Demand During Protection Interval Cumulative Percentage 132 0.4% 18 17.0% Demand During Protection Interval 120% 120 110 115 113 100. Q= 2(2550)($30) = 391 $1 The demand during protection interval distribution is shown below.0% 96.4% 3.4% 60% 57 60 39.

8% 60% 80 67 60 40 100% 40% 27.322 • PART 3 • Managing Value Chains Demand During Protection Interval Distribution Bin Back to Inputs Upper Bound 76 112 148 184 220 256 292 328 364 400 Demand Frequency 58 94 130 166 202 238 274 310 346 More Total 135 159 95 67 34 10 0 0 0 0 500 Average Demand During Protection Interval Cumulative Percentage 109 27.2% 77.0% 98.0% 100.8% 120 80% 95 100 58.0% 91.8% 91.2% 98.0% 100.0% 58. .0% 100.0% 100.0% Demand During Protection Interval Frequency 140 120% 159 160 100.0% 135 100. the florist needs to set the reorder point at 166 baskets.0% 34 10 20 0 58 94 130 166 202 238 20% 0 0 0 0 274 310 346 More Cumulative Percentage 180 0% Demand Frequency Cumulative Percentage To attain at least a 90% cycle service level.8% 77.0% 100.0% 100.0% 100.0% 100.

00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Total Cost $ 275 $ 225 $ 195 $ 110 $ 456 $ 396 $ 341 $ 281 $ 216 $ 201 $ 126 $ 66 $ 402 $ 362 $ 312 $ 242 $ 207 $ 513 $ 463 $ 418 $ 368 $ 313 $ 263 $ 223 $ 213 $ 128 $ 63 $ 399 $ 339 $ 284 $ 229 $ 204 $ 134 $ 480 $ 420 $ 350 $ 290 $ 245 $ 205 $ 195 $ 125 $ 70 $ 396 $ 336 $ 276 $ 226 $ 206 $ 116 $ 437 $ 372 $274.3298 0.8530 0.2470 0.24 .2572 0.2214 0.9648 0.14 Stockout Units 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0.15 0.7790 0.1822 0.40 0.8148 0.8724 0.6197 0.8794 0.4569 0.4061 0.00 Place Order? No No Yes No No No No No No Yes No No No No No No Yes No No No No No No No Yes No No No No No No Yes No No No No No No No Yes No No No No No No Yes No No No Simulated Lead Time 2 3 1 3 2 3 2 2.2316 0.4683 0.1754 0.5249 0.3003 0.8892 0.4173 0.20 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Stockout Cost $0.3544 0.90 4 1.7946 0. the average cost per day is $274.5006 0.2892 0.2087 0.05 0.Inventory Management • CHAPTER 12 • 323 b.2691 0.85 0. As the output from OM Explorer Solver – Q-System Simulator shows. Probability of Weekly Demand Probabilty of Lower Range Demand Probability 0.70 0.7581 0.00 Lower Range Lead Time Probability (Periods) 0.10 0.20 0.8985 0.00 1 0.9560 0.1659 0.30 2 0.9013 0.7621 0.9519 0.4780 0.0554 0.3560 0.3494 0.29 Days to Receive Order 2 1 0 3 2 1 0 1 0 3 2 1 0 2 1 0 3 2 1 0 2 1 0 - Holding Cost $ 275 $ 225 $ 165 $ 110 $ 456 $ 396 $ 341 $ 281 $ 216 $ 171 $ 126 $ 66 $ 402 $ 362 $ 312 $ 242 $ 177 $ 513 $ 463 $ 418 $ 368 $ 313 $ 263 $ 223 $ 183 $ 128 $ 63 $ 399 $ 339 $ 284 $ 229 $ 174 $ 134 $ 480 $ 420 $ 350 $ 290 $ 245 $ 205 $ 165 $ 125 $ 70 $ 396 $ 336 $ 276 $ 226 $ 176 $ 116 $ 437 $ 372 $270.40 0.3090 0.5548 RN II Lead Time 0.9098 0.8676 0.8835 0.1591 0.0 30 10 391 166 300 Simulation of 50 Weeks Beginning Inventory Week 1 300 2 250 3 200 4 130 5 481 6 431 7 361 8 321 9 241 10 191 11 151 12 101 13 422 14 382 15 342 16 282 17 202 18 543 19 483 20 443 21 393 22 343 23 283 24 243 25 203 26 163 27 93 28 424 29 374 30 304 31 264 32 194 33 154 34 505 35 455 36 385 37 315 38 265 39 225 40 185 41 145 42 105 43 426 44 366 45 306 46 246 47 206 48 146 49 477 50 397 Averages 296.7593 0.4341 0.3062 0.7819 0.04 Ordering Cost 30 30 30 30 30 30 30 $4.1673 0.94 Simulated Demand 50 50 70 40 50 70 40 80 50 40 50 70 40 40 60 80 50 60 40 50 50 60 40 40 40 70 60 50 70 40 70 40 40 50 70 70 50 40 40 40 40 70 60 60 60 40 60 60 80 50 53.2803 0.4404 0.2962 0.4660 0.4101 0.9087 0.2831 0.8100 0.4240 0.6586 0.0001 0.5906 0.0235 0.5232 0.5330 0.2128 0.1373 0.9374 0.1054 0.8590 0.70 3 0.7205 0.10 0.40 0.4963 0.4734 0.9240 0.30 0.9864 0.2767 0.8918 0.4669 0.4465 0.00 5 Holding Cost ($/unit/period) $ Order Cost ($/order) $ Stockout Cost ($/unit) $ Order Size Reorder Point Beginning Inventory 1.74.30 0.3099 0.4848 0.8584 0.1393 Probability of Lead Time Demand (Units) 40 50 60 70 80 Probabilty of Lead Time 0.7551 0.80 Ending Inventory 250 200 130 90 431 361 321 241 191 151 101 31 382 342 282 202 152 483 443 393 343 283 243 203 163 93 33 374 304 264 194 154 114 455 385 315 265 225 185 145 105 35 366 306 246 206 146 86 397 347 243.8320 0.6310 0.0755 0.4419 0.9917 0.6821 0.95 1.00 1.8768 0.0953 0.9473 0.8108 0.3310 0.0223 0.7142 0.00 Random Numbers RN I Demand 0.4978 0.8689 0.00 0.2609 0.8927 0.

The simulation results with Q = 40 and R = 15 are: Day 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 a.05 or 19 units 18 No stockouts occurred during any of the three cycles.324 • PART 3 • Managing Value Chains 29. Beginning Inventory 19 14 11 7 46 36 27 20 16 14 7 4 38 28 28 23 13 9 TOTAL Open Orders Received — — — 40 — — — — — — — 40 — — — — — — Daily Demand 5 3 4 1 10 9 7 4 2 7 3 6 10 0 5 10 4 7 Ending Inventory 14 11 7 46 36 27 20 16 14 7 4 38 28 28 23 13 9 2 343 Inventory Position 14 51 47 46 36 27 20 16 14 47 44 38 28 28 23 13 49 42 The average ending inventory is: 343 = 19. b. Amount Ordered 40 — — — — — — — 40 — — — — — — 40 — — .

All the relevant case information and derived data are on the left side of the sheet.Inventory Management • CHAPTER 12 • 325 EXPERIENTIAL LEARNING: SWIFT ELECTRONIC SUPPLY. Consequently. . The instructor can stop at any point. The same benchmarking comparisons can be done at the end of the simulation. the importance of using safety stocks. It is best to precede the simulation with a brief overview of the simulation process and the calculation of costs. Q-system and P-system. and proceeding at a pace such that students have a chance to decide whether or not to order that period. one at a time. All the ordering quantities are rounded up as integers. the associated costs might differ a little from what they actually are. the instructor uses the “actual” demands in TN1. how much to order. The instructor can use the students’ results to discuss differences in the systems tried. students should come with sufficient copies of Table 12. which is optimal for perfect forecasts. The review time in the EOQ-system is actually up to the student.6. There are some other points that need to be addressed about TN3 through TN7: • • • “Average Demand/day” and “Standard Deviation” come from a statistical analysis of the historical demand data in Table 12. The variance is often quite high. INC. In TN4 we have used the EOQ divided by average daily demand. using TN2 to benchmark students’ results against any of the four provided systems in this manual. This in-class exercise allows students to test an inventory system of their design against a new demand set. TN3 shows the cost structure and system parameters for the EOQ-system. The variance in student results will be greater if this exercise is used as a prelude to a discussion of formal inventory systems (such as the Q-system or P-system).4.6. the exercise can be used after a presentation of the formal systems to give students a practicum for the theory. A good idea is to stop at the halfway point in the simulation and ask students what their total costs are. The instructor may decide to require students to bring a computer to class and use a spreadsheet of their design to accomplish the manual tasks embodied in Table 12. One of the provided systems in this manual utilizes the Wagner-Whitin (WW) approach. Alternatively. Once everyone understands the simulation procedure. and the value of perfect information. and key computed parameters for three systems are presented on the right side of the sheet. and calculate relevant costs. On the day of the simulation.

This is consistent with the daily purchasing routine at Swift. TN5 shows the results of the Q-system. Q-system This system assumes that inventory levels are checked on a daily basis and compared to a “Reorder Point (RP). students order the EOQ each and every review period. This implies that the first order for 1733 would have been placed in day 0. Students may elect to use varying review periods. an order is placed to bring the inventory position up to the target inventory level.” which is the review period plus the lead time. TN6 shows the performance of the P-system. without any forecasts of future demand or consideration of demand variability. It is interesting to show the difference in total costs between the WW solution and another system because it demonstrates the cost of uncertainty. If so. The solution using the WW system is shown in TN7. if above. The WW system assumes that stockouts are to be avoided. and the “safety stock. inventory levels at the start of the day are used to make inventory decisions. an order of EOQ is placed. the RP is calculated by adding safety stock to average demand during the two-day lead time. The target inventory level is composed of two parts: “average demand during the protection interval. it provides an absolute lower bound on the solution found by the students. Wager-Whitin (WW) System The WW system is based on dynamic programming and assumes all demands are known with certainty. P-system The inventory level is reviewed every three days. their results will differ from TN4. which is determined by dividing EOQ by average demand. Economic Order Quantity (EOQ) System Under this system. The safety stock is designed to meet the 95 percent cycle service level. Also note that the lot sizes are shown in the day in which they must arrive. . TN4 shows the performance of this system. no order will be placed. which using the case data would be 3 days. In all of our reported results.326 • PART 3 • Managing Value Chains TN4 through TN6 show the application of the provided systems for the demand data in TN1.” If actual inventory level goes below the RP.” Every review period (three days in the provided results). Consequently. In the provided results. one day before the actual start of the simulation. TN7 shows the results from WW system. Actual release dates would be two days earlier.

Inventory Management • CHAPTER 12 • 327 TN 1. Actual Data for Simulation .

40 $ 5.25 1.55 $ 6.884.80 4.90 $ 9.80 2.796.816.099.50 3.35 4.460.416.75 5.663.848.80 8.70 4.90 7.65 Q-System $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 241.90 7.15 $ 6.35 5.45 805.60 $ 2.40 8.726.418.778.604.75 3.064.332.90 3.763.55 $ 8.30 $ 7.05 4.20 $ 10.15 1.454.15 4.404.75 7.958. Total Costs for Four Systems Day Demand 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 870 901 960 702 1068 975 977 662 1147 1085 1041 890 1001 960 863 794 1109 948 1040 1008 961 828 764 933 960 988 1028 967 918 965 1068 996 1123 855 1035 1085 824 941 883 828 993 1008 852 725 667 1015 1167 878 824 863 1085 1067 930 1021 828 724 987 737 750 765 EOQ System $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 241.851.85 $ 4.55 9.550.210.551.70 1.175.396.095.45 1.35 10.007.589.75 7.371.45 P-System $ 241.601.80 $ 9.695.092.40 8.354.751.95 $ 8.470.347.951.869.85 2.20 8.775.55 3.25 1.611.90 $ 2.20 5.85 7.55 3.926.109.35 1.890.420.483.586.85 $ 1.932.715.639.216.70 2.689.70 690.814.15 4.15 5.151.95 $ 4.20 8.05 $ 1.60 5.80 736.130.908.590.95 $ 10.10 10.15 9.65 $ 6.707.543.40 6.755.85 1.316.320.75 $ 4.078.70 9.70 359.70 8.70 1.40 772.813.418.20 10.35 $ 7.634.495.75 8.824.70 8.70 7.55 $ 3.20 4.059.60 $ 8.886.538.648.00 2.075.05 5.80 3.758.073.20 $ 2.024.454.65 8.85 5.589.458.45 $ 3.404.915.100.084.20 5.238.40 $ 5.20 4.35 $ 1.552.796.327.85 $ 4.946.15 4.80 824.95 $ 4.10 6.00 5.40 8.70 7.75 4.254.30 $ 956.85 3.40 $ 6.194.15 5.55 $ 2.152.513.20 9.481.133.454.804.15 4.15 1.00 7.80 2.65 10.163.367.072.50 383.40 4.598.00 $ 10.15 8.00 $ 1.70 6.00 5.20 6.00 $ 10.70 724.55 1.60 1.80 $ 5.323.50 4.35 9.15 4.031.25 $ 7.422.60 2.703.839.35 8.445.80 $ 3.410.586.85 1.657.525.932.50 2.80 $ 2.251.90 3.30 6.133.50 $ 548.401.675.35 2.25 $ 1.25 2.65 6.45 5.70 6.643.65 6.751.10 .65 6.840.044.486.85 5.252.698.30 1.20 $ 10.85 6.016.65 $ 7.641.317.75 2.50 2.361.047.593.709.078.260.30 4.30 1.55 4.90 9.50 $ 8.235.795.258.941.90 3.80 5.026.10 $ 9.70 1.35 3.092.75 3.70 1.85 $ 6.75 4.721.835.40 8.367.60 359.059.30 3.15 2.05 $ 4.05 10.25 2.987.60 10.55 4.00 4.15 4.673.60 9.236.594.65 10.95 $ 879.176.25 2.10 $ 6.062.35 6.958.50 3.502.410.070.441.380.483.150.416.40 8.50 6.931.00 $ 9.368.910.15 5.696.65 3.70 724.327.35 $ 9.80 $ 8.054.50 471.841.50 671.20 3.15 2.246.85 8.409.346.60 5.80 3.40 1.727.70 5.259.30 6.559.543.147.35 5.051.85 1.10 2.55 $ 7.55 4.70 $ 3.55 3.20 2.969.282.421.602.55 3.409.761.60 $ 5.35 805.25 2.079.95 9.952.90 $ 5.917.673.40 $ 10.418.012.491.753.746.460.271.970.753.05 5.341.099.35 $ 3.10 2.148.85 3.795.019.278.261.130.20 6.50 $ 383.20 WW Solution $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 41.50 324.85 5.175.483.75 2.313.246.60 4.45 4.80 2.70 $ 5.186.788.90 9.703.382.352.80 2.65 $ 3.274.75 8.868.413.726.50 6.80 860.401.00 7.50 383.95 7.687.896.663.10 6.10 5.328 • PART 3 • Managing Value Chains TN 2.210.068.

00 0.00 2.05 2724 EOQ System Average time between orders Order Amount Review time in EOQ system 3 2724 3 Q system Average demand during lead time Safety stock Reorder Point for Q system 1854 294 2148 P system Average demand during the protection interval Safety stock Review Period Targeted Inventory Level 4635 464 3 5099 . Cost Structure and System Parameters In-case information Cost of DRAM/piece Ordering cost/lot (S) Stockout cost/piece per day Holding Cost (% of Cost of DRAM per day) Beginning balance The cycle inventory service level Lead tme (Days) Data referred Z value at 95% confidence interval Average Demand/day Standard Deviation Holding Cost/day EOQ $ $ $ $ 10.Inventory Management • CHAPTER 12 • 329 TN 3.00 200.645 927 126 0.50% 1700 95% 2 1.

80 $ 736.10 5.15 8.675.55 $ 94.40 8.70 $ 724.80 2.05 10.65 $ 6.00 200.594.65 $ 91.50 $ $ 88.657.513.60 238.35 84.40 $ 57.915.00 350.00 92.10 $ $ 91.50 4.05 1.45 238. EOQ System Day 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 Demand 870 901 960 702 1068 975 977 662 1147 1085 1041 890 1001 960 863 794 1109 948 1040 1008 961 828 764 933 960 988 1028 967 918 965 1068 996 1123 855 1035 1085 824 941 883 828 993 1008 852 725 667 1015 1167 878 824 863 1085 1067 930 1021 828 724 987 737 750 765 Order quantity 2724 2724 2724 2724 2724 2724 2724 2724 2724 2724 2724 2724 2724 2724 2724 2724 2724 2724 2724 2724 Average EOQ 2724 Beginning Inventory 1700 830 2724 1764 1062 2724 1749 772 2834 1687 602 2724 1834 833 2724 1861 1067 2724 1776 736 2724 1763 935 2895 1962 1002 2738 1710 743 2724 1759 691 2724 1601 746 2724 1639 815 2724 1841 1013 2744 1736 884 2883 2216 1201 2758 1880 1056 2917 1832 765 2724 1703 875 2875 1888 1151 3125 Ending Actual Ending Inventory with Inventory Back orders 830 -71 1764 1062 -6 1749 772 110 1687 602 -439 1834 833 -127 1861 1067 -42 1776 736 -272 1763 935 171 1962 1002 14 1710 743 -175 1759 691 -305 1601 746 -289 1639 815 -126 1841 1013 20 1736 884 159 2216 1201 34 1880 1056 193 1832 765 -165 1703 875 151 1888 1151 401 2360 830 0 1764 1062 0 1749 772 110 1687 602 0 1834 833 0 1861 1067 0 1776 736 0 1763 935 171 1962 1002 14 1710 743 0 1759 691 0 1601 746 0 1639 815 0 1841 1013 20 1736 884 159 2216 1201 34 1880 1056 193 1832 765 0 1703 875 151 1888 1151 401 2360 Holding Cost Stockout Cost Daily total Cost Order Cost $ 41.15 $ 4.33 $ 67.601.15 2.65 6.00 81.00 5.40 257.30 578.10 0.00 88.00 200.064.15 $ 4.00 200.75 $ $ 92.589.00 200.00 200.763.70 $ 6.35 $ 30.20 253.007.926.65 Accumulative Cost to Date $ 241.695.367.80 $ 36.50 2.20 8.70 4.00 88.95 7.05 237.70 $ 4.20 8.80 244.85 $ 1.382.259.60 5.20 10.007.70 $ 9.323.50 84.50 383.35 10.00 544.695.90 9.10 $ $ 87.40 8.00 200.970.60 $ 38.65 91.194.80 4.00 200.15 $ 5.05 253.40 $ 8.513.80 $ 60.65 $ 1.50 $ 471.70 9.80 2.00 254.55 $ 3.260.10 878.00 252.90 $ 9.80 $ 2.317.839.445.15 350.55 98.05 $ 1.15 5.30 $ 4.598.55 $ 20.316.062.75 252.259.00 87.65 6.00 85.80 736.35 $ 9.55 3.85 1.00 878.55 20.40 8.00 87.346.10 $ 0.75 $ 7.50 471.05 118.709.10 10.00 - $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 200.50 $ 84.20 3.987.35 $ 10.35 $ 1.50 $ 2.50 $ 383.80 $ 9.941.05 $ 118.152.327.00 12.915.00 $ 52.70 1.05 250.848.70 $ 7.709.589.20 $ 9.05 $ 53.05 $ 4.163.346.194.483.840.60 10.839.35 $ 8.15 $ 2.15 4.068.30 4.317.260.278.65 $ $ 93.00 200.00 84.598.20 7.10 12.55 610.20 $ 3.65 $ 6.95 $ 9.152.00 200.491.00 200.00 330.70 724.20 $ 10.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 142.20 $ 8.05 $ 50.236.70 6.00 200.330 • PART 3 • Managing Value Chains TN 4.483.148.15 246.969.60 $ 5.70 $ 85.00 86.65 10.10 $ 50.35 9.072.10 250.20 9.278.00 200.05 $ 10.675.70 $ 94.00 80.258.20 $ 53.163.30 $ $ 81.445.15 $ 5.00 578.80 260.072.987.341.15 $ 8.15 243.418.367.10 $ 5.835.40 $ 8.75 7.55 $ 3.25 $ 1.25 1.35 1.65 1.50 $ 4.00 7.382.55 94.590.601.67 $ 180.352.50 237.10 $ 10.55 $ 98.23 Accumulative Costs from Last Day $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 241.00 200.594.75 $ 8.418.15 4.65 254.65 $ 10.763.00 610.00 200.05 $ 37.40 $ 8.663.316.323.941.604.55 $ $ 80.70 94.00 91.00 200.00 927 $ 46.00 93.00 200.15 2.65 $ 10.23 $ 66.15 5.525.352.00 7.35 8.05 4.35 3.25 330.75 8.90 9.95 110.50 $ 37.20 $ 7.604.60 $ 4.00 200.327.15 $ $ 87.00 252.75 $ 8.70 $ 8.00 $ 7.00 200.068.15 $ 46.062.95 $ 40.80 236.25 $ $ 85.00 $ 7.80 $ 44.20 $ 8.80 9.80 $ 2.95 9.15 $ 43.90 $ 9.95 $ 7.848.00 $ 86.064.491.663.70 $ 1.525.35 230.00 200.341.35 $ $ 88.969.00 $ 5.55 3.35 $ 3.80 $ $ 88.00 88.70 7.258.70 8.590.80 824.422.70 85.236.418.813.422.75 8.840.50 142.418.657.60 $ 10.95 $ 34.95 234.65 .835.70 241.148.95 240.926.80 544.70 $ 41.80 $ 4.15 $ 2.970.60 4.95 $ 110.45 $ 38.00 - $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 241.80 $ 824.

775.30 96.824.371.00 5.00 200.50 2.65 6.45 5.75 7.40 294.15 5.755.90 124.721.65 6.85 7.05 283.044.147.746.851.00 200.95 69.550.45 19.00 200.60 9.10 135.70 1.551.908.30 141.80 8.75 305.45 135.35 4.20 48.75 7.90 124.824.238.80 142.896.282.024.10 157.37 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 200.90 7.698.495.20 2.65 8.75 105.641.95 156.084.15 9.20 53.45 58.00 200.35 4.917.60 64.416.84 Accumulative Costs from Last Day Accumulative Cost to Date $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 241.816.55 1.20 6.00 70.15 34.45 24.361.00 2.05 83.15 38.15 139.05 5.00 2.00 200.084.15 99.55 4.70 7. Q-System Day Beginning Inventory Demand 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 1700 830 2724 1764 3786 2718 1743 3490 2828 1681 3320 2279 1389 3112 2152 1289 3219 2110 3886 2846 1838 3601 2773 2009 3800 2840 1852 3548 2581 1663 3422 2354 1358 2959 2104 3793 2708 1884 3667 2784 1956 3687 2679 1827 3826 3159 2144 3701 2823 1999 3860 2775 1708 3502 2481 1653 3653 2666 1929 3903 870 901 960 702 1068 975 977 662 1147 1085 1041 890 1001 960 863 794 1109 948 1040 1008 961 828 764 933 960 988 1028 967 918 965 1068 996 1123 855 1035 1085 824 941 883 828 993 1008 852 725 667 1015 1167 878 824 863 1085 1067 930 1021 828 724 987 737 750 765 Average Reorder Point for Q System Order Quantity Ending Inventory with Back Orders 830 -71 1764 1062 2718 1743 766 2828 1681 596 2279 1389 388 2152 1289 495 2110 1162 2846 1838 877 2773 2009 1076 2840 1852 824 2581 1663 698 2354 1358 235 2104 1069 2708 1884 943 2784 1956 963 2679 1827 1102 3159 2144 977 2823 1999 1136 2775 1708 778 2481 1653 929 2666 1929 1179 3138 2148 2724 Actual Ending Inventory Inventory Position Order Quantity 830 0 1764 1062 2718 1743 766 2828 1681 596 2279 1389 388 2152 1289 495 2110 1162 2846 1838 877 2773 2009 1076 2840 1852 824 2581 1663 698 2354 1358 235 2104 1069 2708 1884 943 2784 1956 963 2679 1827 1102 3159 2144 977 2823 1999 1136 2775 1708 778 2481 1653 929 2666 1929 1179 3138 830 2724 1764 3786 2718 1743 3490 2828 1681 3320 2279 1389 3112 2152 1289 3219 2110 3886 2846 1838 3601 2773 2009 3800 2840 1852 3548 2581 1663 3422 2354 1358 2959 2104 3793 2708 1884 3667 2784 1956 3687 2679 1827 3826 3159 2144 3701 2823 1999 3860 2775 1708 3502 2481 1653 3653 2666 1929 3903 3138 2724 0 2724 0 0 2724 0 0 2724 0 0 2724 0 0 2724 0 2724 0 0 2724 0 0 2724 0 0 2724 0 0 2724 0 0 2724 0 2724 0 0 2724 0 0 2724 0 0 2724 0 0 2724 0 0 2724 0 0 2724 0 0 2724 0 0 2724 0 0 1709.47 2.282.85 5.35 55.75 7.441.80 860.20 53.816.95 291.054.65 46.35 6.80 48.238.931.40 8.40 107.958.70 724.15 133.070.40 8.75 8.85 7.15 5.05 29.147.15 34.05 282.775.20 53.589.85 5.40 4.30 141.946.45 53.50 142.65 46.410.90 287.15 139.931.095.90 157.15 4.80 3.95 91.65 3.75 8.095.45 4.80 5.20 129.35 2.80 2.495.75 285.20 6.60 1.20 6.958.95 307.95 107.45 133.00 200.80 2.421.80 8.50 58.380.60 2.70 7.80 142.416.30 296.45 24.30 291.55 4.90 87.746.851.75 3.40 284.90 85.55 241.361.40 4.45 .95 56.35 6.50 58.40 107.421.50 2.90 117.721.90 43.755.90 3.00 92.60 1.75 305.10 157.25 2.80 5.327.70 8.30 3.946.251.778.50 383.611.10 142.90 11.416.00 292.90 7.368.85 138.20 47.151.210.20 97.00 288.210.30 6.313.00 200.80 48.841.35 55.10 142.90 43.55 4.410.40 1.45 133.20 6.401.75 3.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ - 41.441.611.908.40 84.75 105.00 200.50 671.254.80 3.80 2.368.80 860.454.35 2.024.85 8.55 1.25 2.05 29.00 Daily Total Cost $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 241.65 300.00 200.550.40 38.Inventory Management • CHAPTER 12 • 331 TN 5.80 113.55 9.251.00 200.20 47.151.55 3.85 1.416.50 671.65 100.15 1.40 38.85 138.313.15 9.401.48 2662.05 82.70 724.05 5.778.40 8.50 383.054.45 5.470.45 58.10 135.75 85.327.05 5.65 8.044.88 953.95 156.95 56.95 269.45 53.804.698.15 299.70 67.332.589.332.65 3.85 141.454.641.20 48.00 200.85 141.551.30 3.20 2.75 7.15 4.896.70 8.884.30 91.70 1.371.55 3.070.663.00 200.804.15 38.00 200.45 19.60 264.55 4.00 200.70 267.30 6.50 88.663.20 53.186.05 5.40 6.90 7.60 41.80 138.40 94.047.884.40 1.15 133.85 1.047.40 Holding Cost Stockout Cost Ordering Cost $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 142.90 3.00 200.20 129.00 5.60 2.917.20 297.00 200.40 8.254.80 113.00 200.00 200.60 41.00 200.00 200.90 11.85 8.841.80 138.45 4.80 2.380.60 9.40 6.90 7.15 1.186.45 135.90 117.

90 170.643.109.80 8.70 3.00 9.65 6.50 110.35 163.75 60.70 5.80 3.10 300.00 200.00 200.910.85 4.55 2.20 2.50 8.00 200.00 200.10 68.90 112.95 107.5 5099 Holding Cost $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 41.80 8.40 5.95 70.65 152.70 157.10 322.235.70 154.00 1.25 1.90 9.35 3.35 134.25 7.20 2.150.75 122.85 1.55 2.95 307.35 72.00 200.60 2.176.70 111.85 4.70 3.35 3.00 1.55 6.332 • PART 3 • Managing Value Chains TN 6.65 6.40 5.483.00 200.175.261.396.075.958.50 383.00 106.20 10.90 170.20 10.80 307.00 200.758.868.35 60.10 9.00 200.175.50 8.55 95.80 169.05 1.410.00 79.758.55 8.593.85 4.483.502.10 122.35 7.216.073.696.00 200.00 200.20 158.40 132.410.727.75 322.019.50 68.25 7.20 110.35 9.274.031.10 76.17 Accumulative Costs from Last Day $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 241.35 1.00 Accumulative Cost to Date $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 241.869.15 105.70 156. P-System Day 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 Average Target Inventory Level Beginning Inventory Demand 1700 830 4269 3309 2607 4031 3056 2079 4437 3290 2205 4058 3168 2167 4139 3276 2482 3990 3042 2002 4091 3130 2302 4335 3402 2442 4111 3083 2116 4181 3216 2148 4103 2980 2125 4064 2979 2155 4158 3275 2447 4106 3098 2246 4374 3707 2692 3932 3054 2230 4236 3151 2084 4169 3148 2320 4375 3388 2651 4349 870 901 960 702 1068 975 977 662 1147 1085 1041 890 1001 960 863 794 1109 948 1040 1008 961 828 764 933 960 988 1028 967 918 965 1068 996 1123 855 1035 1085 824 941 883 828 993 1008 852 725 667 1015 1167 878 824 863 1085 1067 930 1021 828 724 987 737 750 765 Ending Inventory with Back orders 830 -71 3309 2607 1539 3056 2079 1417 3290 2205 1164 3168 2167 1207 3276 2482 1373 3042 2002 994 3130 2302 1538 3402 2442 1454 3083 2116 1198 3216 2148 1152 2980 2125 1090 2979 2155 1214 3275 2447 1454 3098 2246 1521 3707 2692 1525 3054 2230 1367 3151 2084 1154 3148 2320 1596 3388 2651 1901 3584 Actual Ending Inventory 830 0 3309 2607 1539 3056 2079 1417 3290 2205 1164 3168 2167 1207 3276 2482 1373 3042 2002 994 3130 2302 1538 3402 2442 1454 3083 2116 1198 3216 2148 1152 2980 2125 1090 2979 2155 1214 3275 2447 1454 3098 2246 1521 3707 2692 1525 3054 2230 1367 3151 2084 1154 3148 2320 1596 3388 2651 1901 3584 2219 Inventory Position Order quantity 830 4269 4269 3309 2607 2492 4031 3056 2079 3020 4437 3290 2205 2894 4058 3168 2167 2932 4139 3276 2482 2617 3990 3042 2002 3097 4091 3130 2302 2797 4335 3402 2442 2657 4111 3083 2116 2983 4181 3216 2148 2951 4103 2980 2125 2974 4064 2979 2155 2944 4158 3275 2447 2652 4106 3098 2246 2853 4374 3707 2692 2407 3932 3054 2230 2869 4236 3151 2084 3015 4169 3148 2320 2779 4375 3388 2651 2448 4349 3584 3196.552.05 4.60 149.092.320.648.80 9.00 200.593.271.092.00 200.80 59.60 76.100.10 49.00 10.00 200.85 1.90 2.109.814.648.60 2.00 10.00 79.60 5.35 60.05 185.80 3.97 Stockout Cost $ $ 142.10 68.60 8.703.20 10.552.35 9.80 59.25 1.80 324.10 100.40 332.25 152.20 .50 148.00 165.45 3.10 76.10 9.85 4.55 104.70 156.869.543.80 9.80 2.70 5.252.60 8.90 160.25 58.80 169.05 179.00 200.35 76.50 68.00 66.35 7.951.40 10.483.55 3.50 142.271.639.15 6.15 6.50 148.10 72.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2.481.20 57.031.65 7.073.175.85 6.80 107.35 1.80 5.602.40 308.60 5.639.538.80 303.715.80 103.95 70.40 116.55 8.30 956.15 305.150.95 10.00 9.70 154.016.70 157.65 3.50 315.95 4.50 310.55 95.41 Ordering Cost $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 200.486.40 108.016.05 4.420.35 334.90 2.707.85 164.35 163.55 6.90 5.55 3.95 4.45 3.788.689.70 163.40 5.40 6.40 6.413.176.10 72.55 7.50 548.274.60 149.075.261.90 9.85 6.65 3.40 57.35 157.413.216.40 5.910.35 72.100.70 311.347.00 306.483.75 60.20 57.00 200.481.05 1.538.10 49.95 152.320.10 6.50 383.70 154.95 4.35 157.05 179.486.60 76.90 312.347.75 4.788.00 200.67 Daily total Cost $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 241.00 200.80 2.45 130.30 7.441 2882.95 8.25 54.45 330.55 7.761.65 152.890.20 158.643.952.90 5.80 5.019.70 163.65 7.958.90 160.703.396.50 165.30 76.25 152.00 200.30 956.95 879.696.715.175.85 164.25 54.40 10.25 58.55 304.890.814.502.252.95 4.80 124.40 316.00 200.95 879.761.20 10.012.952.20 181.35 76.689.707.602.50 548.70 154.75 4.30 76.95 10.543.50 115.40 57.95 152.30 7.95 8.012.10 6.951.420.05 185.00 10.727.235.

2 5932.9 End Backorder Cum.75 4460.75 4795.9 3454.1 2703.3 Minimum Total Cost 6673.45 1059.9 3753.75 3051.1 6634.1 .5 3454.3 6246.3 1687.4 772.55 4092 4133.7 690.45 805.85 1726.35 805.75 2751.149 4460.3 1404.35 5586.7 359.25 2078.7 2409.85 2026.7 5932.25 2367.Inventory Management • CHAPTER 12 • 333 TN 7.149 4753.6 359.85 5543.5 6246.15 1726.85 6673.85 3099. Wagner-Whitin (WW) Solution Period 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 Average Demand Lot Size 870 901 960 702 1068 975 977 662 1147 1085 1041 890 1001 960 863 794 1109 948 1040 1008 961 828 764 933 960 988 1028 967 918 965 1068 996 1123 855 1035 1085 824 941 883 828 993 1008 852 725 667 1015 1167 878 824 863 1085 1067 930 1021 828 724 987 737 750 765 0 1733 0 0 3682 0 0 0 2232 0 2932 0 0 2617 0 0 3097 0 0 2797 0 0 2657 0 0 2983 0 0 2951 0 0 2974 0 0 2944 0 0 2652 0 0 2853 0 0 2407 0 0 3732 0 0 0 3082 0 0 2573 0 0 3239 0 0 0 902.75 2751.25 1404.5 3099.35 5886.8 3796.1 6673.2 4418. Cost 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 41.2 5586.1 2409.6 5458.5 6559.10 End Inventory 1700 830 1662 702 0 2614 1639 662 0 1085 0 1891 1001 0 1657 794 0 1988 1040 0 1789 828 0 1893 960 0 1995 967 0 2033 1068 0 1978 855 0 1909 824 0 1711 828 0 1860 852 0 1682 1015 0 2565 1687 863 0 1997 930 0 1552 724 0 2252 1515 765 0 973.7 1354.25 2078.85 5130.75 5079.149 4795.85 3401.7 6210.55 3796.7 1059.5 324.2 4133.6 5130.

followed by a cost comparison between this continuous review system and the one now being used. Rob Bregman. Enough information is available to determine the EOQ and R for a continuous review system (or P and T for a periodic review system). Working with the weekly demands for the first 21 weeks of this year and assuming 52 business weeks per year. The difference is what can be realized by a better inventory control system.85 = 339 gaskets Turning to R.304 )( $20 ) $1. Purpose The purpose of this case is to allow the student to put together a plan. . She seeks ways to cut the bloated inventories while improving customer service.68 × $12. even though sales have not increased. B. Synopsis This case describes the problems facing Sue McCaskey.85 per gasket per year (or 0. New plan Begin by estimating annual demand and the variability in the demand during the lead time for this first item. We then find * This case was prepared by Dr. McCaskey decides to begin with a sample of two products to uncover the nature of the problems—the EG151 exhaust gasket and the DB032 drive belt. Inventories were much higher than expected when the new facility was built. the Normal Distribution appendix shows that a 95% cycle-service level corresponds to a z = 1. Inventory holding costs are 21% of the value of each item (expressed at cost). Shown here are the calculations of the EOQ and R. Analysis We now find appropriate policies for a Q system. as a basis for classroom discussion. we find the EOQ as follows: Weekly demand average = 102 gaskets/week Annual demand (D) = 102(52) = 5304 gaskets Holding cost = $1.334 • PART 3 • Managing Value Chains CASE: PARTS EMPORIUM * A. using either a continuous review system (Q system) or a periodic review system (P system). 1. such as inventory turns. Reducing lost sales due to back orders is surely the biggest benefit.21 × 0. Summary data on inventory statistics. for two inventory items. a 95% cycle-service level is recommended. beginning with the exhaust gasket. Back orders with excessive lost sales are all too frequent. EG151 Exhaust Gasket a. University of Houston. Because stockouts are costly relative to inventory holding costs. are not available.645. C. The ordering costs ($20 for exhaust gaskets and $10 for drive belts) should not be increased to include charges for making customer deliveries. the new materials manager of a wholesale distributor of auto parts. These charges are independent of the inventory replenishment at the warehouse and are reflected in the pricing policy.99) Ordering cost = $20 per order EOQ = 2 ( 5.

If 10 percent of annual sales were lost with the current policy.85(4) = $7.16(0.645.76 belts. One symptom of such losses is that 11 units are on back order in week 21. The extra cost of this safety stock is minimal.99). and their annual holding cost is just another $1. Cost Category Ordering cost Holding cost (cycle inventory) TOTAL Current Plan $707 139 $846 Proposed Plan $313 314 $627 The total of these two costs for the gasket is reduced by 26 percent (from $846 to $627) per year.76 3 = 3 belts R = Average demand during the lead time + Safety stock = 3(52) + 1.86 gaskets.21 × 0.6. if the reason for the excess back orders is that no safety stock is now being held (inaccurate inventory records or a faulty replenishment system are other explanations). Surely the lost sales due to back orders are substantial with the current plan and will be much less with the proposed plan.645(4) = 210.40. or 161 belts .86 2=4 R = Average demand during the lead time + Safety stock = 2(102) + 1. × $12. where t = 1 Standard deviation in demand during lead time (σ L ) = 1.206 per year. where t = 1σ Standard deviation in demand during lead time (σ L ) = 2. this cost would be $4. 704 )( $10 ) $0.52 × $8.32. The safety stock with the proposed plan may be higher than the current plan.645(3) = 160. we find: Standard deviation in weekly demand (σ t ) = 1. where z remains at 1.97 per belt per year (or 0. A lost sale costs a minimum of $4.89) Ordering cost $10 per order EOQ = 2 ( 2. Cost comparison After developing their plan. students can compare its annual cost with what would be experienced with current policies. We find the EOQ as follows: Weekly demand average = 52 belts/week Annual demand (D) = 52(52) = 2704 belts Holding cost $0.10)(5304) = $2. 2. or 211 gaskets b.9.Inventory Management • CHAPTER 12 • 335 Standard deviation in weekly demand (σ t ) = 2. however.97 = 236 gaskets Turning now to R. Weeks 11 and 12 are excluded from the analysis because the new product’s start-up makes them unrepresentative. Such a loss would be much reduced with the 95% cycle-service level implemented with the proposed plan. Only four gaskets are being held as safety stock.16 per gasket (0. New plan The following demand estimates are based on weeks 13 through 21. DB032 Drive Belt a.

as with the gaskets. Begin with a general discussion of how to do the analysis and then work through the analysis. students again can compare the cost for the belts with what would be experienced with current policies. using the actual demand data in the first 21 weeks of this year for the gaskets and the last 9 weeks of this year for the belts.336 • PART 3 • Managing Value Chains b. Each team can have a different assignment (P or Q system. the recommendation is to implement a continuous review system with Q = 236 and R = 161. Use a form to record the simulation. Cost Category Ordering cost Holding cost (cycle inventory) TOTAL Current Plan $ 27 485 $512 Proposed Plan $115 114 $229 With the belt.97(3) = $2. If used without prior student preparation. D. the instructor should provide the mean and standard deviation of the weekly demand for the two products. Teaching Strategy This case can be used as a “cold-call” case or as a short case prepared in advance of the class meeting.155. The safety stock with the proposed plan may be higher with the proposed system. but added cost for safety stock is only $0. it works best as a team assignment. the total of these two costs is reduced by 55 percent. the cost with the current policy would be $4. The discussion at the end can broaden into other issues. Cost comparison After developing their plan. If done with teams. the instructor can have the class hand-simulate their policies. Simulating the new system is similar to what is to be done in Advanced Problem 29 in the chapter. such as applying the notion of inventory levers and the use of systems other than a Q system to control inventories. . The big cost once again is the lost sales due to back orders with the current plan.27 per belt (0. When used as a cold-call case and time is a concern.10)(2704) = $1.91. If time permits.27(0. If 10 percent of annual sales were lost. and on-hand inventory can be what is mentioned in the case for week 21. Recommendations For the gasket. For the belt. either as a handout or transparency. E. It brings back the fundamental notions of cycle inventory and ordering costs that were introduced in this Inventory Management chapter. Such a loss would be much less with the 95% cycle-service level implemented with the proposed plan.48 × $8. The starting conditions on back orders. After the teams develop their policies.89). have them make the cost comparison. give each time to follow through. scheduled receipts. gasket or belt). the recommendation is to implement a continuous review system with Q = 339 and R = 211. A lost sale costs a minimum of $4.