PROBLEMS: of replenishment and carrying costs, what should the ‘company do? What other considerations might affect the decision? 5.4 A manufacturing firm located in Calgary pro- duces an item in a three-month time supply. An ana- lyst, attempting to introduce a more logical approach to selecting run quantities, has obtained the following estimates of characteristics of the item: = $4 per 100 units 25 $/$/yr ‘Note: Assume that the production rate is much larger than D. a. Whatis the economic order quantity of the item? b. What is the time between consecutive replen: ishments of the item when the EOQ is used? ©. The production manager insists that the A = $6 figure is only a guess. Therefore, he insists on using his simple three-month supply rule. Indicate how you would find the range of A values for which the OQ (based on A = $5) would be preferable (in terms of lower totalof replenishmentand carrying costs)*to the three-month supply. 5.5 Suppose that all of the assumptions of the EOQ, derivation hold except that we now allow backorders (that is, we deliberately let the stock level run negative before we order; backordered requests are completely filled out of the next replenishment). Now there are two decision variables: Q and s (the level below zero. ‘at which we place an order). 1. Using a sketch and geometrical considerations, find the average on-hand inventory level and the average level of backorders. b. Suppose that there is a cost Byo per unit backor- dered (independent of how long the units backor- Alored) where Ry iva dimensionless factor. Find the best settings of Qand s.asa function of A, D, v, and By. ¢. Repeat part (b) but now with a cost B.v per unit oY backordered per unit time, The dimensions of By are equivalent to those for r (58) The famous Emie of Sevame Steet continually es replenishment devisions concerning his ewukie supply. The Cookie Monster devours the cookies at an average rate of 200 per day. The cookies cost $0.03 each, Emie is geting fed up with having to go to the 189 store once a week. His friend Bert has offered to do. a study to help Ernie with his problem. a. If Emie is implicitly following an EOQ policy, what can Bert say about the implicit values of the two missing parameters? 'b, Suppose that the store offered a special of 10,000 cookies for $200. Should Ernie take advantage of the offer? Discuss. (Hint: Consult your local TV listing for the timing of and channel selection for Sesame Stret) 5.7 U.R. Sick Labs manufactures penicillin, Briefly discuss special considerations required in establishing the run quantity of such an item. 3.8 Table 5.1 was developed based on management specifying permitted values of the order quantity ex- pressed asa time supply. Suppose, instead, that order quantities (in units) were specified. a Develup au indifference condition beween wo adjacent permitted values, namely Q, and Qe. b. For A = $10 and r= 0.25 $/$/yr, develop a table, similar to Table 5.1 (although the variable involving D and v need not necessarily be Dz), for Qvalues of 1, 10, 50, 100, 200, 500, and 1,000 units ¢. For an item with D = 500 units/year and v = 0.10 $/unit, what is the exact OW? What Q does the table suggest using? What is the cost penalty “ associated with the use of this approximate Qvalue? A mining company routinely replaces a specific ton a certain type of equipment. The usage rate isforty per week, and there is no significant seasonality. The supplier of the part offers the following all-uits discount structure, ee) Unit Cost $10.00 970 {1-3 jy8 The fixed cost of a replenishment is estimated to be $25, and a carrying charge of 0.26 $/$/yr is used by the company. a. What replenishment size should be used? b. If the supplier was interested in having the min- ing company acquire at least 500 units at a time, ‘what is the largest unit price they could charge for an order of 500 nits? ee large quantity purchases. Suppose that all of the as sumptions of the basic EOQ apply except that a reverse el192 (ORDER QUANTITIES WHEN DEMAND IS APPROXIMATELY LEVEL, In your report you must specifically cover the follow. ing points a. A graphical representation of the inventory pro- cess. (What is the fraction of time spent at the rate Di?) ’. A total cost equation, defining the terms. c. Abrief explanation of the method of obtaining the optimal order quantity 4. A numerical example using A = $20; wr = $2 Dy = 30; D, = 15. ¢. How much should be ordered in the above mu- ‘merical example if D, = D; = 30? 5.21 A supplier offers a manufacturer an item at @ 5 percent discount on orders of 500 units or more, and a 15 percent discount on orders of 1,000 units or Fium past experience, it appears that demand for this item is 3,075 units/year. If the ordering cost 4s $50, the basic price (without discount) of the item is $2, and an rvalue of 0.20 $/$/yr is used, how often should the manufacturer order from the supplier? ‘What order quantity should be used? 5.22 A supplier offers the following discount struc- tare on puichiases of any single item. 0< Q< 1000 $5.00 per unit 1000 = Q< 2000 $4.90 per unit 2000 = $4.75 per unit ‘The discounts apply to all units. For each of the follow- ing items treated separately, what is the appropriate order quantity to use, assuming a common value of 7 = 0.80 $/8/yr? tem D (units/year) As 1 10,000 2B 2 1.000 5 3 4,000 & 4 180,000 % (623) A company stocks three items having the follow: ing characteristics: Item, i Di (onies/year) 9 ($/unit) 1 1000 5.00 2 4000 0.80 200 4.00 a. Develop an exchange curve of total average stock (in $) versus total number of replenishments, per year under an EOQ strategy treating A/ras the policy parameter. . Plot the current operating position on the graph. ¢. For what values of A/rwould the EOQ strategy produce an improvement on both aggregate di- 5.24 Consider a quantity discount problem in which the form of the discount differs from the all-units case we have discussed in this chapter. Specifically, the sup- plier offers an incremental discount such that the lower price applies only to the number of units in the particular discount interval, not to all units ordered. a, Using the notation introduced in Section 5.5, ‘write a total cost expression as a function of the order quantity, Q, for the case of just two discount intervals (the first is the regular price, and the sec- ond is the discount price). 'b. Write a total cost expression for any number, i, discount intervals. ¢. Define an algorithm for Binding the optimal ar- der quantity. 4, For the following case, find the optimal order quantity 0< Q<100 $20.00 per unit loo =Q $19.50 per unit Also r = 0.30 $/$/yr; A = $24; D = 1200 units/year. 5.25 a, Develop a spreadsheet to compute the EOQand the total relevant cost associated with any order quantity. 'b. Repeat part (a) for the case of the allunits quan- tity discount, ¢. Repeat part (a) for the case of the incremental discount described in Problem 5.24. d, Repeat part (a) for the case of a finite replen- ishment rate. ce. Repeat part (a) for the EOQ that accounts for an inflation rate. 5.26 ‘The May-Bee Company distributes firefighting equipment. Approximately 50 percent of the con oe SSS SS