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M12 Heiz5577 01 Se C12
M12 Heiz5577 01 Se C12
C H A P T E R
Inventory Management
146
CHAPTER 12 I N V E N T O R Y M A N A G E M E N T 147
judgment call on the part of the hospital administrator. Another END-OF-CHAPTER PROBLEMS
major disaster means a certain shortage, yet any higher level may
be hard to cost justify. Many hospitals do develop joint or regional 12.1 An ABC system generally classifies the top 70% of dollar
groups to share supplies. The basic issue is how to put a price tag volume items as A, the next 20% as B, and the remaining 10% as
on lifesaving medicines. This is not an easy question to answer, C items. Similarly, A items generally constitute 20% of total
but it makes for good discussion. number of items, B items are 30%; and C items are 50%.
Percent of
ACTIVE MODEL EXERCISES Item Code Average Total $
Number Dollar Volume Volume
ACTIVE MODEL 12.1: Economic Order Quantity 1289 ® 400 ´ 3.75 = 1,500.00 44.0%
(EOQ) Model 2347 ® 300 ´ 4.00 = 1,200.00 36.0%
1. What is the EOQ and what is the lowest total cost? 2349 ® 120 ´ 2.50 = 300.00 9.0%
EOQ 200 units with a cost of $100 2363 ® 75 ´ 1.50 = 112.50 3.3%
2394 ® 60 ´ 1.75 = 105.00 3.1%
2. What is the annual cost of carrying inventory at the EOQ and
2395 ® 30 ´ 2.00 = 60.00 1.8%
the annual cost of ordering inventory at the EOQ of 200 units.
6782 ® 20 ´ 1.15 = 23.00 0.7%
$50 for carrying and also $50 for ordering
7844 ® 12 ´ 2.05 = 24.60 0.7%
3. From the graph, what can you conclude about the relationship 8210 ® 8 ´ 1.80 = 14.40 0.4%
between the lowest total cost and the costs of ordering and 8310 ® 7 ´ 2.00 = 14.00 0.4%
carrying inventory? 9111 ® 6 ´ 3.00 = 18.00 0.5%
The lowest total cost occurs where the ordering and $3,371.50 100%
inventory costs are the same. (rounded
)
4. How much does the total cost increase if the store manager
orders 50 more hypodermics than the EOQ? 50 fewer hypodermics? The company can make the following classifications:
Ordering more increases costs by $2.50 or 2.5%. A: 1289, 2347 (18% of items; 80% of dollar-volume).
Ordering fewer increases costs by $4.17 or 4.17% B: 2349, 2363, 2394, 2395 (36% of items; 17.2% of dollar-volume).
5. What happens to the EOQ and total cost when demand is C: 6782, 7844, 8210, 8310, 9111 (45% of items; 27% of dollar-
doubled? When carrying cost is doubled? volume).
The EOQ rises by 82 units (41%) and the total cost rises 12.2 You decide that the top 20% of the 10 items, based on a
by $41 (41%) in either case. criterion of demand times cost per unit, should be A items. (In this
6. Scroll through lower setup cost values and describe the example, the top 20% constitutes only 58% of the total inventory
changes to the graph. What happens to the EOQ? value, but in larger samples the value would probably approach
The curves seem to drop and move to the left. The EOQ 70% to 80%.) You therefore rate items F3 and G2 as A items. The
decreases. next 30% of the items are A2, C7, and D1; they represent 23% of
7. Comment on the sensitivity of the EOQ model to errors in the value and are categorized as B items. The remaining 50% of
demand or cost estimates. the items (items B8, E9, H2, I5, and J8) represent 19% of the
The total cost is not very sensitive to mistakes in value and become C items.
forecasting demand or placing orders.
Annual
ACTIVE MODEL 12.2: Production Order Quantity Item Demand Cost ($) Demand Cost Classificatio
Model n
1. What is the optimal production run size for hubcaps? A2 3,000 50 150,000 B
283 B8 4,000 12 48,000 C
C7 1,500 45 67,500 B
2. How does this compare to the corresponding EOQ model? D1 6,000 10 60,000 B
The run size is larger than the corresponding EOQ. E9 1,000 20 20,000 C
3. What is the minimal cost? F3 500 500 250,000 A
$70.71 G2 300 1,500 450,000 A
H2 600 20 12,000 C
4. How does this compare to the corresponding EOQ model? I5 1,750 10 17,500 C
The total cost is less than the cost for the equivalent EOQ J8 2,500 5 12,500 C
model.
148 CHAPTER 12 I N V E N T O R Y M A N A G E M E N T
12.3
#Ordere
$Value d (52 Weeks) Cumulative
Inventory per per Total $ Total Percent of Percent of
Item Case Week Value/Week ($*Weeks) Rank Inventory Inventory
Fish filets 143 10 $1,430 $74,360 1 17.54% 34.43%
French fries 43 32 $1,376 $71,552 2 16.88% 47.31%
Chickens 75 14 $1,050 $54,600 3 12.88% 59.53%
Prime rib 166 6 $996 $51,792 4 12.22% 69.83%
Lettuce (case) 35 24 $840 $43,680 5 10.31% 78.85%
Lobster tail 245 3 $735 $38,220 6 9.02% 83.82%
Rib eye steak 135 3 $405 $21,060 7 4.97% 87.25%
Bacon 56 5 $280 $14,560 8 3.44% 90.64%
Pasta 23 12 $276 $14,352 9 3.39% 93.74%
Tomato sauce 23 11 $253 $13,156 10 3.10% 95.71%
Tablecloths 32 5 $160 $8,320 11 1.96% 97.60%
Eggs (case) 22 7 $154 $8,008 12 1.89% 98.28%
Oil 28 2 $56 $2,912 13 0.69% 98.72%
Trashcan liners 12 3 $36 $1,872 14 0.44% 99.13%
Garlic powder 11 3 $33 $1,716 15 0.40% 99.42%
Napkins 12 2 $24 $1,248 16 0.29% 99.72%
Order pads 12 2 $24 $1,248 17 0.29% 99.83%
Pepper 3 3 $9 $468 18 0.11% 99.93%
Sugar 4 2 $8 $416 19 0.10% 99.93%
Salt 3 2 $6 $312 20 0.07% 100.00%
$8,151 $423,852 100.00%
(a) Fish filets total $74,360.
(b) C items are items 10 through 20 in the above list
(although this can be one or two items more or less).
(c) Total annual $ volume = $423,852.
12.4 where D annual demand, S setup or order cost, H holding
7,000 0.10 700 700 20 35 35 A items per day cost
7,000 0.35 2,450 2450 60 40.83 41 B items per day
7,000 0.55 3,850 3850 120 32 32 C items per day
108 items
2(19,500)(25)
12.5 (a) EOQ Q = 493.71 494 units
4
(b) Annual holdings costs [Q/2]H [494/2](4) $988
(c) Annual ordering costs [D/Q]S [19500/494](25) $987
2(8,000)45
12.6 EOQ 600 units
2
12.7 This problem reverses the unknown of a standard EOQ
problem to solve for S.
2 240 S 480 S
60 ; or 60 , or
.4 10 4
3,600
60 120 S , so solving for S results in S $30.
12
That is, if S were $30, then the EOQ would be 60. If the true
ordering cost turns out to be much greater than $30, then the
firm’s order policy is ordering too little at a time.
12.8 (a) Economic Order Quantity (Holding cost $5 per year):
2 DS 2 400 40
Q 80 units
H 5
CHAPTER 12 I N V E N T O R Y M A N A G E M E N T 149
2 DS 2 × 12,500 × 30
Q= = = 671 (a)
H 1 – dp 2 1 – 50
300
D 12,500
(b) Number of production runs ( N ) = = = 18.63
Q 671
d 50
(c) Maximum inventory level Q 1 = 671 1
p 300
1
= 671 1 = 559
6
559
(18.63 30) 2 $1,117.90
2
152 CHAPTER 12 I N V E N T O R Y M A N A G E M E N T
HQ SD
TC (200 units) = PD + +
2 Q
30 × 200 120 × 4,800
= (300 × 4,800) + +
2 200
= 1,440,00 + 3,000 + 2,880 = $1,445,880
The minimum order quantity is 200 units yet again
because the overall cost of $1,445,880 is less than ordering
188 units, which has an overall cost of $1,566,119.
12.21 The solution to any quantity discount model involves
determining the total cost of each alternative after quantities have
been computed and adjusted for the original problem and every
discount.
We start the analysis with no discount:
2(1,400)(25)
EOQ (no discount) =
0.2(400)
= 29.6 units
Total cost (no discount) = Cost of goods + Ordering cost
+ Carrying cost
1,400(25)
$400(1,400)
29.6
29.6($400)(0.2)
2
$560,000 $1,183 $1,183
$562,366
The next step is to compute the total cost for the discount:
2(1,400)(25)
EOQ (with discount) =
0.2($380)
= 30.3 units
EOQ (adjusted) = 300 units
Because this last economic order quantity is below the discounted
price, we must adjust the order quantity to 300 units. The next
step is to compute total cost.
Total cost (with discount) = Cost of goods + Ordering cost
+ Carrying cost
1,400(25)
= $380(1,400) +
300
300($380)(0.2)
2
$532,000 $117 $11,400
$543,517
The optimal strategy is to order 300 units at a total cost of
$543,517.
12.22 D = 45,000, S = $200, I = 5% of unit price, H = IP
Best option must be determined first. Since all solutions yield Q
values greater than 10,000, the best option is the $1.25 price.
2 DS
(a) Q* = = 16,970.56
IP
Q 16,971
(b) Annual holding cost = ( IP ) = (.05) (1.25)
2 2
= $530.33
D 45,000
Annual order (setup) cost = (S ) = (200)
Q 16,971
= $530.33
154 CHAPTER 12 I N V E N T O R Y M A N A G E M E N T
(c)
Allen
1–499 $16.00
500–999 $15.50
1,000 $15.00
Baker
1–399 $16.10
400–799 $15.60
800 $15.10
2 DS 2(8,400)50
(a) Q 409.88 410
H 5
CHAPTER 12 I N V E N T O R Y M A N A G E M E N T 155
1,000 8,400
at 1,000, TC (5) (50) 8,400(15)
2 1,000
$128,920 BEST
Vendor: Baker
410 8,400
at 410, TC (5) (50) 8,400(15.60) $133,089.39
2 410
800 8,400
at 800, TC (5) (50) 8,400(15.10) $129,365
2 800
Vendor Allen best at Q = 1,000, TC = $128,920.
12.25 S 10, H 3.33, D 2,400
EOQ 120 with slight rounding
Costs
Qty Price Holding Ordering Purchase Total
120 $33.55 $199.80 $200.00 $80,520.00 $80,919.80 Vendor A
150 $32.35 $249.75 $160.00 $77,640.00 $78,049.75
300 $31.15 $499.50 $80.00 $74,760.00 $75,339.50
500 $30.75 $832.50 $48.00 $73,800.00 $74,680.50
120 $34.00 $199.80 $200.00 $81,600.00 $81,999.80 Vendor B
150 $32.80 $249.75 $160.00 $78,720.00 $79,129.75
300 $31.60 $499.50 $80.00 $75,840.00 $76,419.50
500 $30.50 $832.50 $48.00 $73,200.00 $74,080.50 BEST
120 $33.75 $199.80 $200.00 $81,000.00 $81,399.80 Vendor C
200 $32.50 $333.00 $120.00 $78,000.00 $78,453.00
400 $31.10 $666.00 $60.00 $74,640.00 $75,366.00
120 $34.25 $199.80 $200.00 $82,200.00 $82,599.80 Vendor D
200 $33.00 $333.00 $120.00 $79,200.00 $79,653.00
400 $31.00 $666.00 $60.00 $74,400.00 $75,126.00
(b, c) Costs
Qty Price Holding Ordering Purchase Total
336 $17.00 $1,428.00 $1,428.57 $163,200.00 $166,056.57 Vendor 1
500 $16.75 $2,093.75 $960.00 $160,800.00 $163,853.75
1000 $16.50 $4,125.00 $480.00 $158,400.00 $163,005.00
335 $17.10 $1,432.13 $1,432.84 $164,160.00 $167,024.97 Vendor 2
400 $16.85 $1,685.00 $1,200.00 $161,760.00 $164,645.00
800 $16.60 $3,320.00 $600.00 $159,360.00 $163,280.00
1200 $16.25 $4,875.00 $400.00 $156,000.00 $161,275.00 BEST
156 CHAPTER 12 I N V E N T O R Y M A N A G E M E N T
The BB-1 set should therefore have a safety stock of 30 units; ROP 90 units.
12.32 Only demand is variable in this problem so Equation ROP (Daily demand Average lead time in days)
(12-15) applies Daily demand LT
(a) ROP (Average daily demand Lead time in days)
ZdLT
(1,000 2) (2.055)( d ) Lead time
2,000 2.055(100) 2
2,000 291 2,291 towels
(b) Safety stock 291 towels
12.33 Only lead time is variable in this problem, so Equation
(12-16) is used.
1.88 for 97% service level
CHAPTER 12 I N V E N T O R Y M A N A G E M E N T 157
163,750 405
So ROP 1,200 (1.28)(405) 1,200 518 1,718 cigars
12.35 Fixed-period model.
Q Target – On hand – Orders not received
40 – 5 – 18 17 poles.
158 CHAPTER 12 I N V E N T O R Y M A N A G E M E N T
12.36
Holding Ordering Cost
dLT
LT (15) 4 (15) 30
Cost
ROP 369.99 where ROP (d)(LT) SS
$2,000 1,500
600 500 (e) SS 69.99 from part (d)
750 800
280 30,000 (f) Annual safety stock holding cost $209.97
12,800 500 (g) 2% stockout level Z = 2.054
800 1,000 SS (Z)(dLT) 61.61
300 $34,300 The lower we make our target service level, the less
$17,53 SS we need.
Note: Items of new product development, advertising, and
research are not part of holding or ordering cost.
$34,300 CASE STUDIES
Cost per order $171.50
200 1 ZHOU BICYCLE COMPANY
$17,530
Holding cost per unit $1.753 1. Inventory plan for Zhou Bicycle Company. The forecasted
10,000
demand is summarized in the following table:
(2)(1000)(171.5)
Therefore, EOQ 442.34 units. Jan 8 July 39
1.753
Feb 15 Aug 24
12.37 Annual demand, D 8,000 Mar 31 Sept 16
Daily production rate, p 200 April 59 Oct 15
Setup cost, S 120 May 97 Nov 28
Holding cost, H 50 June 60 Dec 47
Production quantity, Q 400 Total 43
9
(a) Daily demand, d D/250 8,000/250 32
Average demand per month 439/12 36.58 bicycles. The
(b) Number of days in production run Q/p 400/200 2
standard deviation of the monthly demand 25.67 bicycles. The
(c) Number of production runs per year D/Q 8,000/400 20 inventory plan is based on the following costs and values.
Annual setup cost 20($120) $2,400
Order cost $65/order
(d) Maximum inventory level Q(1 – d/p) Cost per bicycle $102.00
400(1 – 32/200) 336 Holding cost ($102.00) (1%) 12 per year per bicycle
Average inventory Maximum/2 336/2 168 $12.24 per year per bicycle
Service level 95%, with corresponding Z value of 1.645
(e) Total holding cost Total setup cost (168)50 20(120)
Lead time 1 month (4 weeks)
$8,400 $2,400
Total demand/year 439 units of bicycles
$10,800
The solution below uses the simple EOQ model with reorder point
2 DS 2(8,000)120 and safety stock. It ignores the seasonal nature of the demand. The
Q 213.81
(f) d 32 fluctuation in demand is dealt with by the safety stock based on
H 1 1
p
50 200
the variation of demand over the planning horizon.
Economic order quantity (Q*) is given by:
Total holding cost Total setup cost 4,490 4,490 $8,980
2 (Total demand) (Ordering cost)
Savings $10,800 – $8,980 $1,820 Q*
Holding cost
12.38 (a) d 75 lbs/day 200 days per year D 15,000 lb/year
H $3/lb/year S $16/order where the total demand and the holding cost are calculated on the
2(15,000)(16) same time unit (monthly, yearly, etc.). Thus,
Q 400 lb of beans
3 2 439 65
Q Q* 68 units of bicycles
(b) Total annual holding cost = H = (200)($3) = $600 12.24
2
D 2. The reorder point is calculated by the following relation:
(c) Total annual order cost = S = (37.5)(16) = $600
Q Reorder point (ROP) Average demand during the lead time ()
(d) LT 4 days with 15 Stockout risk 1% Z (Standard deviation of the
demand during the lead time ())
2.33
Therefore, (ROP) 36.58 1.645 (25.67) 79 bicycles.
ROP Lead time demand SS
where SS ( )(dLT) and lead time demand (d)(LT) Safety stock (SS) is given by SS Z 1.645(25.67) 42
bicycles. Inventory cost is calculated as follows:
CHAPTER 12 I N V E N T O R Y M A N A G E M E N T 159
and locked stockrooms. Management would have to exhibit the *These case studies appear on our Companion Web site, www.prenhall.
proper leadership and support of the entire system, including com/heizer.
accurate bills of material, rapid issuing of ECNs, training budgets,
etc.
2DS 2(499.5) 50
Q*
H 41.4
Q* 34.74 thousand feet
The reorder point is given by:
ROP = Daily demand Lead time
499.5
= (60)
260
ROP = 115.27 thousand feet
Currently, the company is committed to take 1/12 of its annual
need each month. Therefore, each month the storeroom issues
a purchase requisition for 41,625 feet of cable.
499.5 41.625
Present TC (50) (41.4) (499.5)(414)
41.625 2
= 600 + 861.62 + 206,793
= $208,254.62
499.5 34.74
Optimum TC (50) (41.4) (499.5)(414)
34.74 2
= 718.91 + 719.12 + 206,793
= $208,231.03
Savings Present TC Optimum TC $23.59
Ordering costs are assumed to be a linear function because no
matter how large an order is or how many orders are sent in, the
cost to order any material is $50 per order.
The student should recognize that it is doubtful the firm will
or should alter any current ordering policy for a savings of only
$23.