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MECH 6076 (Supply Chain Management for Engineers) Test II

1. SPC produces plastic sheets. The company estimated that the inventories (in thousand
pounds) it needs to hold during the four quarters in a year are 300, 900, 200, and 400,
respectively. It costs $20 to store and handle 1 thousand pounds of plastic sheets for a
quarter in a public warehouse. Private warehouse requires a yearly lease, with a cost of $40
per square foot (which can hold 1 thousand pounds of plastic sheets). In addition, SPC
incurs a material handling costs of $2 per thousand pounds of plastic sheets stored each
quarter when using a private warehouse. Assuming no isle space is required (3 points)
(a) What is the cost SPC incurs if only public warehouse is used?
(b) What is the cost SPC incurs if only private warehouse is used?
(c) Develop a plan to use a combination of public and private warehouses to reduce the cost.

(a) When using public warehouse, the yearly storage and handling cost is (300 + 900 + 200 +
400) × $20 = $36,000
(b) When using private warehouse, SPC incurs lease cost and material handling cost, in addition
to capital cost; the private warehouse must be big enough to store the highest level of
inventory during the year, therefore SPC needs to lease 900 square feet of space; the yearly
lease cost is 900 × $40 = $36,000; the yearly material handling cost is (300 + 900 + 200 +
400) × $2 = $3,600; therefore, the yearly cost when using a private warehouse is $36,000 +
$3,600 = $39,600
(c) Because the lowest level of inventory during the year is 200, SPC can lease 200 square feet
of private warehouse; the yearly lease cost is 200 × $40 = $8,000, the yearly material
handling cost is 200 × $2 × 4= $1,600; extra inventory will be stored in the public warehouse
with a yearly cost of (100 + 700 + 0 + 200) × $20 = $20,000; the total yearly cost is $8,000 +
$1,600 + $20,000 = $29,600
*there are other solutions

2. Daily demand of car batteries in Best Auto Mart (BAM) is normally distributed with a mean
of 15 and a standard deviation of 10. BAM opens 365 days a year. Its replenishment lead
time follows a normal distribution with a mean of 5 days and a standard deviation of 2 days.
The inventory holding cost at BAM is $17 per battery per year. The fixed ordering cost is
$315 per order. BAM targets a cycle service level of 95% [F-1 (0.95,0,1)=1.64]. It uses a
periodic review policy. (4 points)
(a) How often should BAM review its inventory?
(b) On average, what is the yearly inventory holding cost incurred by BAM?

(a) D = 15×365 = 5475; O = 315; H = 17

2 DO 2  5475  315
Q*    450
H 17
Review interval should not be more than T = 365/(D/Q*)=365/(5475/450) = 30 days.
It can be verified that a review interval of 30 days will result in the lowest average inventory
cost (ordering cost + cycle inventory cost + safety inventory cost).
(b) L = 5; E = 2; CSL = 0.95; D = 15; D = 10;
 T  L  (T  L) D2   D2  E2  (30  5)  102  152  2 2  66.33
ss  FS1 CSL   T  L  1.64  66.33  109
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Cycle inventory = Q/2 = 450/2 = 225

Average yearly inventory holding cost = (225 + 109) × $17 = $5,678

3. The Great Outdoors sells mountain bikes and ATVs. The average monthly demand of
mountain bikes and ATVs are 300 and 120, respectively. The annual inventory holding cost
for a mountain bike is $40; whereas the annual inventory holding cost for an ATV is $160.
Products are shipped by Transfreight with the following cost structure:
 For mountain bikes, there is a fixed shipping cost of $1,000 (irrespective of the amount
shipped) and a variable handling cost of $1 per unit shipped
 For ATVs, there is a fixed shipping cost of $2,000 (irrespective of the amount shipped)
and a variable handling cost of $3 per unit shipped.
The Great Outdoors incurred a fixed ordering cost of $500 every time orders of mountain
bikes and/or ATVs are processed. Currently, the company orders mountain bikes and ATVs
separately (5 points).
a. Develop an ordering plan for the Great Outdoors to minimize yearly inventory cost
(ordering + shipping + holding) under current ordering policy.
b. What is the minimal yearly inventory cost (ordering + shipping + holding) for the Great
Outdoors if it orders mountain bikes and ATVs jointly?
c. Can joint ordering save money for the Great Outdoors? If yes, how much?
d. Can the Great Outdoors reduce yearly product handling cost charged by Transfreight?
Why?

Given
Bikes ATVs
D (monthly) 300 120
D (yearly) 3600 1440
H 40 160
oi 1000 2000
vi 1 3
O 500

(a). The company orders mountain bikes and ATVs separately.

For bikes,

Total cost

For ATVs,
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Total cost

(b) The company orders mountain bikes and ATVs jointly.

Total cost

(c) Yes, the joint ordering save money for the Great Outdoors. The saving is

(d) No. Because the yearly product handling cost depends on yearly demand, which does not
change.

4. Weekly demand of packs of AAA batteries in BVE store is normally distributed with a mean
of 1,000 and a standard deviation of 50. The fixed ordering cost is $130 per order. The
inventory holding cost is $1.5 per pack of batteries per year. The replenishment lead time is
2 weeks. The company uses a continuous review policy with an order lot size of 3,000. BVE
makes a profit of $1.7 per pack of batteries. Currently demand during stockout is lost. (4
points)
(a) What is the optimal CSL?
(b) BVE is considering a plan to backlog customer demand and mail the batteries to
customers when the inventory is replenished. It does not offer any discount but the
mailing cost is estimated to be $1 per pack of batteries. What is the optimal CSL under
this plan?
D = 52×1000 = 52,000; H = $1.5; Q = 3,000
DCu 52000 1.7
(a) Cu = $1.7; CSL*   = 0.95
DCu  QH 52000 1.7  3000 1.5
(b) In addition to price discount of $1 per pack, BVE incurs a mailing cost of $2 per pack on
QH 3000  1.5
behalf of the customer, therefore Cd = $3; CSL*  1  1 = 0.91
DCd 52000  1
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5. Yearly demand of water heaters at R&B follows a normal distribution with a mean of 32,400
and a standard deviation of 3,600. Daily demand is independent. The company operates 324
days a year and uses a continuous review policy with an order quantity of 5,000. The
replenishment lead time is 4 days. It aims to achieve a CSL of 95% (4 points).
(a). What is the safety inventory required to achieve the desired CSL?
(b). What is the expected fill rate?
(a)

(b)
  ss   ss 
ESC   ss 1  FS     L f S  
   L  L 
  658   658 
 658  1  FS    400 f S  
  400   400 
 658  1  0.950  400  0.103
 10.36
ESC 10.36
fr  1   1  0.998
Q 5000