SEEM4610 - Supply Chain Management

Tutorial 2

Min LUO
mluo@se.cuhk.edu.hk
30 Sep, 2015
ABC Classification

Classifying inventory according to some measure of

importance and allocating control efforts accordingly.

I A - very important (contains about 10-20% of the items and

60-70% of the annual dollar value)
I B - important
I C - less important (contains about 50-60% of the items but
10-15% of the annual dollar value)

80/20 Rule: For many events, roughly 80% of the effects come
from 20% of the causes.
I The richest 20% of the world’s population controls 80% of
the world’s income.
I 80% of a company’s sales come from 20% of its products.
ABC Classification

Classifying inventory according to some measure of

importance and allocating control efforts accordingly.

I A - very important (contains about 10-20% of the items and

60-70% of the annual dollar value)
I B - important
I C - less important (contains about 50-60% of the items but
10-15% of the annual dollar value)

80/20 Rule: For many events, roughly 80% of the effects come
from 20% of the causes.
I The richest 20% of the world’s population controls 80% of
the world’s income.
I 80% of a company’s sales come from 20% of its products.
Question 1 in Assignment 2
Question 1 in Assignment 2
Question 1 in Assignment 2

I greater expenditure on supplier development for A items

than for B items or C items
I tighter physical control on A items than on B items or on C
items
I greater expenditure on forecasting A items than on B items
or on C items
Roughly, class A contains 20% of the item and P05 has the
largest proportion among the rest items, so it can be the new
goal with the control effort in the decision.
Problem 2 in Assignment 2

I A motorcycle assembly plant in Michigan purchases

engine from a supplier in Minneapolis. Engines are
transported using trucks, with each trip costing $1,200.
The motorcycle plant assembles and sells 1800
motorcycles each month. Each engine costs $500, and the
firm incurs a holding cost of 20 percent per year.
I How many engines should the firm order each time? What
is the cycle inventory of engines at the firm.
I Solution:
S = 1200, q q∗ 12 = 21600, C = 500, h = 0.2,
D = 1800
2DS 2∗21600∗1200
thus Q ∗ = hC = 0.2∗500 = 720
I Cycle inventory is 720/2=360.
Problem 2 in Assignment 2

I A motorcycle assembly plant in Michigan purchases

engine from a supplier in Minneapolis. Engines are
transported using trucks, with each trip costing $1,200.
The motorcycle plant assembles and sells 1800
motorcycles each month. Each engine costs $500, and the
firm incurs a holding cost of 20 percent per year.
I How many engines should the firm order each time? What
is the cycle inventory of engines at the firm.
I Solution:
S = 1200, q q∗ 12 = 21600, C = 500, h = 0.2,
D = 1800
2DS 2∗21600∗1200
thus Q ∗ = hC = 0.2∗500 = 720
I Cycle inventory is 720/2=360.
Problem 3 in Assignment 2

I As part of its initiative to implement just-in-time

manufacturing at the motorcycle assembly plant in problem
2, the firm has reduced the number of engines loaded on
each truck to 500.
I If each truck trip still costs $1,200, how does this decision
impact annual inventory costs at the firm?
I What should the cost of each truck be if a load of 500
engines is to be optimal for the firm?
Solution for Problem 3

I Consider the total controllable cost,

D Q
TCC(Q) = S( ) + hC( )
Q 2
TCC(500) = 1200 ∗ 21600/500 + 0.2 ∗ 500 ∗ 500/2 = 76840
∗
TCC(Q ) = 1200 ∗ 21600/720 + 0.2 ∗ 500 ∗ 720/2 = 72000

I About 6.7% increase of the controllable cost.

q
hCQ 2
I Q = 2SDhC ⇒ S = 2D =
0.2∗500∗250000
2∗21600 = 578.7.
Problem 4 of Assignment 2

I Ray’s Satellite Emporium wishes to determine the best

order size for its best-selling satellite dish (model TS111).
Ray has estimated the annual demand for this model is
1,000 units. His cost to carry one unit is $50 per year per
unit, and he has estimated that each order costs $250 to
place.
I Using the EOQ model, how many should Ray order each
time?
I If we assume the order lead time is 1 month, when he
should place the order?
I If we assume the order lead time is 4 months, when he
should place the order?
Solution for Problem 4

q
I D = 1000, H = 50, S = 250, Q ∗ = 2SD
H = 100 and
∗ ∗
corresponding T = Q /D = 0.1 (1.2 months).
I If the order lead time L is 1 month, we have T ∗ > L.
Therefore ROP = Q ∗ L/T ∗ = 83.3 ≈ 84.
I If L is 4 months, we have T ∗ < L, Therefore
ROP = Q ∗ F [L/T ∗ ] = 100 ∗ F [4/1.2] = 100/3 = 33.3 ≈ 34
Solution for Problem 4

q
I D = 1000, H = 50, S = 250, Q ∗ = 2SD
H = 100 and
∗ ∗
corresponding T = Q /D = 0.1 (1.2 months).
I If the order lead time L is 1 month, we have T ∗ > L.
Therefore ROP = Q ∗ L/T ∗ = 83.3 ≈ 84.
I If L is 4 months, we have T ∗ < L, Therefore
ROP = Q ∗ F [L/T ∗ ] = 100 ∗ F [4/1.2] = 100/3 = 33.3 ≈ 34
Solution for Problem 4

q
I D = 1000, H = 50, S = 250, Q ∗ = 2SD
H = 100 and
∗ ∗
corresponding T = Q /D = 0.1 (1.2 months).
I If the order lead time L is 1 month, we have T ∗ > L.
Therefore ROP = Q ∗ L/T ∗ = 83.3 ≈ 84.
I If L is 4 months, we have T ∗ < L, Therefore
ROP = Q ∗ F [L/T ∗ ] = 100 ∗ F [4/1.2] = 100/3 = 33.3 ≈ 34
Chapter 11, Exercise 4

I Prefab, a furniture manufacturer, uses 20,000 square feet

of plywood per month. Its trucking company charges the
firm $400 per shipment, independent of the quantity
purchased. The manufacturer offers an all unit quantity
discount as follows,
I under 20,000 square feet, $1 per square foot; between
20,000 and 40,000 square feet, $0.98 per square foot;
greater than 40,000 square feet, $0.96 per square foot.
I Prefab incurs a holding cost of 20 percent. What is the
optimal lot size for the firm? What is the annual cost of
such a policy? What is the cycle inventory of plywood at
the firm?
I How does it compare with the cycle inventory if the
supplier does not offer a quantity discount but sells all
plywood at $0.96 per square foot?
Chapter 11, Exercise 4

Solution:
I D = 20000 ∗ 12 = 240000, S = 400, h = 0.2,
C0 = 1,
qC1 = 0.98, C2 =√0.96.
∗ 2SD ∗
Q = hC and TC = 2DShC + CD.
I Q0 = 30984(> 20000, ignore),
Q1 = 31298(feasible, letQ1∗ = Q1 ),
Q2 = 31623(< 40000, letQ2∗ = 40000)
√
I Now we compute TC1 (Q1∗ ) = 2DSH + C1 D = 241397,
TC2 (Q2∗ ) = 400 ∗ 240000/40000 + 0.2 ∗ 0.96 ∗ 40000/2 +
0.96 ∗ 240000 = 236640.
Note that the lowest total cost is TC2 , the optimal lot size is
Q2∗ = 40000. The cycle inventory is 40000/2 = 20000.
Chapter 11, Exercise 4

Solution:
I If the supplier does not offer a quantity discount but sells all
plywood at $0.96 per square foot, the cycle inventory will
be Q2 /2 = 15812.