CTL.

SC1x - Supply Chain & Logistics Fundamentals

Inventory Management I
Deterministic Demand

RECITATION

MIT Center for

Transportation & Logistics
 Problem
You have been hired by the MIT bookstore to help them improve
their supply chain operations. The store manager has asked you
to look into managing one of their wildly popular pamphlets on
student life. The demand for this pamphlet is exceptionally
stable – there is virtually no variability.
The bookstore sells about 5,000 of the pamphlets annually to
students and tourists for $10 per copy. You discover that they
have been ordering the pamphlets using an order quantity of
500 units and that it costs the bookstore $100 to place an order.
You also find out that the store pays the publisher $2 per copy
and that the store’s inventory holding cost is 0.28 $/$/year.

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Inventory Management 2
 Question a)

What are the annual purchase, holding,

order, and total cost of their current policy?
How frequently do they place orders?

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Inventory Management 3
 Solution a) Purchase Cost

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Inventory Management 4
 Solution a) Order Cost

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Inventory Management 5
 Solution a) Holding Cost

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Inventory Management 6
 Solution a) Total Cost

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Inventory Management 7
 Question b)
Two other store employees have suggested
that you can improve this. Sally suggests that
you order using an EOQ policy. Bob suggests
that the original order quantity is fine and that
he has a way of reducing the set up cost to
only $25 per order.

b) What is the annual purchase, order, holding

and total cost for Bob’s and Sally’s plans?
What is the ordering frequency of each option?

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Inventory Management 8
 Solution b) Sally’s Approach

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Inventory Management 9
 Solution b) Bob’s Approach

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Inventory Management 10
 Question c)

Can we improve on what we have done so

far?

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Inventory Management 11
 Question d) Refining the Policy

Picking up an ordering time that is practical

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Inventory Management 12
CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Inventory Management 13
 Comparison of Approaches

Total  Cost/   T  
PLAN ct Q  (Units)
Year 1  Yr.  =  52  wk.  =  12  mo.

Current $100 500 $11,140 5.2  wks

Sally $100 1336 $10,748 16.1  wks

Bob $25 500 $10,390 5.2  wks

Sally  +  Bob $25 668 $10,374 7  wks

With  Power  of  Two $25 769 $10,378 8  Weeks

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Inventory Management 14