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MGNT 3430: Operations Management

Fall 2014
Homework 10 Answers

Q8 (p. 337). At Dot Com, a large retailer of popular books, demand is constant at 32, 000 books
per year. The cost of placing an order to replenish stock is $10, and the annual cost of holding is
$4 per book. Stock is received 5 working days after an order has been placed. No backordering is
allowed. Assume 300 working days a year.
a. What is Dot Coms economic order quantity?
b. What is the optimal number of orders per year?
c. What is the optimal interval (in working days) between orders?
d. What is the demand during the lead time?
e. What is the reorder point?
f. What is the inventory position immediately after an order has been placed?

Answer. Dot Com


a.
r r
2DS 2(32, 000)($10)
EOQ = =
H $4
= 400 books
b. Optimal number of orders per year is
D 32, 000
= = 80 orders
Q 400
c. Optimal time between orders is
Q 400
= = 0.0125 years
D 32, 000
or 0.0125 years 300 days/year = 3.75 days

d. Demand during the lead time


32, 000 books 1 year 32, 000 books
d = =
year 300 days 300 days
L = 5 days
 
=32, 000
dL (5) = 533 books
300
e. Demand and lead time are constraint - no need for safety stock. Reorder point is
= 533 books
dL
f. Inventory position (IP)
IP = OH + SR BO
= 533 + 400 0
= 933 books
Q9 (p. 337-338). Leaky Pipe, a local retailer of plumbing supplies, faces demand for one of its
SKUs at a constant rate of 30, 000 units per year. It costs Leaky Pipe $10 to process an order to
replenish stock and $1 per unit per year to carry the item in stock. Stock is received 4 working
days after an order is placed. No backordering is allowed. Assume 300 working days a year.

a. What is Leaky Pipes economic order quantity?


b. What is the optimal number of orders per year?
c. What is the optimal interval (in working days) between orders?
d. What is the demand during the lead time?
e. What is the reorder point?
f. What is the inventory position immediately after an order has been placed?

Answer. Leaky Pipe, Inc.

a.
r r
2DS 2(30, 000)($10)
EOQ = =
H $1
= 775 units

b. Optimal number of orders per year is


D 30, 000
= = 39 orders
Q 775
c. Optimal time between orders is
Q 775
= = 0.02583 years
D 30, 000

or 0.02583 years 300 days/year = 7.75 days

d. Demand during lead time is


 
= 30, 000
dL (4 days) = 400 units
300

e. Demand and lead time are constraint - no need for safety stock. Reorder point is
= 400 = 400 units
dL

f. Inventory position (IP)

IP = OH + SR BO
= 400 + 775 0
= 1, 175 units
Q10 (p. 338). Sams Cat Hotel operates 52 weeks per year, 6 days per week, and uses a continuous
review inventory system. It purchases kitty litter for $11.70 per bag. The following information is
available about these bags.

Demand: 90 bags/week
Order cost: $54/order
Annual holding cost: 27 percent of cost
Desired cycle-service level: 80 percent (so z = 0.84)
Lead time: 3 weeks
Standard deviation of weekly demand: 15 bags
Current on-hand inventory is 320 bags, with no open orders or backorders.

a. What is the EOQ? What should be the average time between orders (in weeks)?
b. What should R be?
c. An inventory withdrawal of 10 bags was just made. Is it time to reorder?

Answer. Sams Cat Hotel

a. Economic order quantity

d = (90 bags/week)(52 weeks/year) = 4, 680 bags/year


S = $54
Value of each bag = $11.70
H = (27%)($11.70) = $3.16
r r
2DS 2(4, 680)(54)
EOQ = = = 400 bags
H 3.16
EOQ 400
T BOEOQ = = = 0.08547 years
D 4, 680
b. Reorder point, R

R = Average demand during lead time + Safety stock



+ zd L
R = dL

= 90 3 + 0.84 15 3 = 270 + 22 = 292 bags

c. Initial inventory position = OH +SRBO = 320+00 = 320. When 10 bags are withdrawn,
inventory position gets equal to 320 10 = 310 bags. Because inventory position remains
above 292, it is not yet time to place an order.
Q26 (p. 340). Osprey Sports stocks everything a musky fisherman could want in the Great North
Woods. A particular musky lure has been very popular with local fishermen as well as those who buy
lures on the Internet from Osprey Sports. The cost to place orders with the supplier is $30/order;
the demand averages 4 lures per day, with a standard deviation of 1 lure; and the inventory holding
cost is $1.00/lure/year. The lead time from the supplier is 10 days, with a standard deviation of 3
days. It is important to maintain a 97 percent cycle-service level to properly balance service with
inventory holding costs (i.e., z = 1.88). Osprey Sports is open 350 days a year to allow the owners
the opportunity to fish for musses during the prime season. The owners want to use a continuous
review inventory system for this item.

a. What order quantity should be used?


b. What reorder point should be used?
c. What is the total annual cost for this inventory system?

Answer. Osprey Sports

a. The economic order quantity

D = 4 350 = 1, 400 lures per year


r r
2DS 2(1, 400)($30) p
EOQ = = = 84, 000 = 289.83 ' 290 lures
H $1
b. Safety stock
q
Ld2 + d2 LT
p
2
dLT = = (10)(1)2 + (4)2 (3)2 = 12.41 lures

Safety stock = 1.88(12.41) = 23.33 or 23 lures

Reorder point

dL + Safety stock = (4)(10) + 23 = 63 lures

c. The total annual cost for this continuous review system is


   
Q D
C = H+ S + (H)(Safety stock)
2 Q
   
290 1, 400
= + $30 + ($1)(23)
2 290
= $312.83