Name: Farhan Zubair

ID: 181 640 52……..

Section 01
1. Explain briefly the trade-off analysis between inventory holding and shortage costs by citing
an example.

Answer: Inventory is referred to the goods which are stored by a firm or business to satisfy
the needs of the customer on upcoming times. However, holding the inventory is associated with
various types of cost. If a firm is holding inventory the capital is tied up in the inventory and which
could be invested somewhere else which would generate more profit. Such type of opportunity
cost is referred to as holding or carrying cost of inventory. This cost is comprised with storing cost,
insurance premium cost, taxes on inventory holding, salaries and wages of the storing employees,
various supplies including forms and papers for the warehouse, and probable costs related to
spoilage, theft or obsolescence. Stock out or shortage cost arises when the demand of a customer
cannot be met for shortage of the products and includes installation cost, storage space, delayed
revenue, record keeping, and so on. A product is called backorder or backlogged if a customer
agrees to take delivery of that product on a later date. If the customer does not agree for late
delivery, he/she may go elsewhere to secure the product and is referred as lost sale. This leads to
the loss of reputation and could be expensive due to poor customer satisfaction. If a firm holds
huge amount of inventory then it incurs huge amount of carrying cost, whereas the shortage cost
will be very low since the customers will be able to satisfy their demand and vice versa. As an
example, the Best Buy showrooms usually holds huge amount of inventory of plastic products and
it leads to increased carrying cost. But since most of the products are always available the
customers are happy and satisfy their demands leading to less shortage cost with less reputational
loss. On the other hand, the Happy Mart showrooms usually stores less inventory to reduce the
carrying cost. However, many customers have to return empty handed since there is not enough
product to satisfy the demand. As such, the customers prefer to go to the Best Buy showrooms
avoiding the Happy Mart showrooms increasing the reputational loss and shortage cost for them.
 Name: Farhan Zubair
ID: 181 640 52……..

2. Discuss the relationship between the safety stock and shortage of products due to variation in
demand.

Answer: Safety stock is referred to the inventory level which are maintained as a measure of
precaution meet the sudden increase in the demand of the customers. Lead time is referred to the
time it takes to obtain the products after the order is placed. Reorder point is the level of inventory
at which the next order should be placed. In order to determine the reorder point, it is assumed that
the lead time and the customer demand is constant. However, not always this is the case. The
demand for a product by the customers may vary from time to time. We can forecast closely to the
actual demand but cannot predict it accurately. Since in the real world the demand is not certain,
we need to carry a certain level of safety stock to meet the demand of the uncertain demands.
Suppose, the calculated reorder point for any TC showroom is 8 units. However, they do not carry
any safety stock. The lead time is 3 days. At the time of world cup there is a sudden increase in
the purchase of TV. Even though the showroom has placed an order on the specific reorder point,
due to the increased demand the 8 TV’s might be sold in couple of hours and the showroom has to
stay empty before the next lot arrives if there is not any safety stock. As such it is essential to carry
safety stock for any business. However, the business should determine its safety stock based on
the past data of demand trend. Unnecessary safety stock will increase the carrying cost and may
lead to overall loss for the business.

3. What are the three major functional areas of organizations? Describe how they interrelate?

Answer: An organization is defined as a processing unit of producing outputs by processing

the inputs and selling them to the customers to make profit. Usually an organization has three basic
functional areas including finance, operations and marketing.

a. Finance: Finance has three parts mainly including financial security, budgeting and
funding. Financial security is referred as the ensuring protection of the financial aspects or
resources from internal or external threats. Budgeting is defined as the spending plan of an
organization including in which sectors it will incur cost and how it will be covered.
Funding is the described as providing the fund to finance a project, need or program within
an organization.
 Name: Farhan Zubair
ID: 181 640 52……..

b. Operations: Operations is the management of interior mechanism of a business so that it

can run efficiently to achieve the organizational goals in less effort. It actually refers to the
process of transforming outputs from inputs both in service and manufacturing industries.
c. Marketing: It can be referred to as the collective activities or processes for the creation,
communication, delivery of products or services which are valued by customers, partners
and society. Initially the demand of the customer need to be assessed and then through
selling and promoting the demands need to be fulfilled.

The above three functional areas are closely interrelated. Finance helps to identify the source
of funds with lowest cost and identifies the key areas those need funding through budgeting. With
the funds obtained from finance the operations start producing products in a targeted efficient
manner which are stored in the warehouse. And finally the marketing promotes the products
produced to the customer and generates revenue. This revenue is again handed over to finance to
make the funding arrangement and budgeting. As such the three functional areas are closely
interrelated.

4. Distinguish between quality-based and time-based strategies.

Answer: Quality-based strategies refer to the focus on maintaining and continuous

improvement of the products or services of an organization. In this strategy the companies starts
by applying quality raw materials as inputs with highly efficient employees or workers to create
top quality products. These companies do not have strict time limitation to create any product but
it may have a generic time limitation as a whole. As an example we can refer to the Rolex watch
company, which creates state of the art watches with the possible best qualities. The time allocated
to create a watch is not limited, rather the company emphasizes on the quality of the product.

On the other hand, the time based strategy focuses on continuous reduction of time required
to accomplish a task including minimizing production time or service delivery time. By devising
various strategies a company can focus on minimizing the planning time, processing time, delivery
time and complaint processing time to attain the result of time based strategies. We can refer to
the delivery companies like DHL as time based company. By digitizing the order placing and order
tracking platform, DHL has minimized the time allocated for each step of delivery. Picking up the
 Name: Farhan Zubair
ID: 181 640 52……..

product, marking the product for correct destination, selecting the appropriate medium to transfer
which is fast and cost effective and finally delivering the product to the right recipient has been
fully digitized. Through this advancement of technology, DHL has been able to attain the time
based strategy. However, in the time based strategy, the quality of the service is often
compromised. We have seen many cases of damaged products by the delivery company due to
negligence and to increase the time management efficiency.

6. Illustrate what do you understand by trend, irregular and random variations in time series
forecasting.

Answer: The firms tend to prefer operate in less volatile situations and to avoid uncertainties.
However, in the real world it is not always possible. That’s why managers use the forecasting
techniques to predict the future with less deviation. Under the time series forecasting method we
find 4 components including Trend, Seasonality, Cycles and Random or irregular variations.

Trend refers to the gradual upward or downward movement of the data over a period of time.
As an example, the population of the world is increasing ever since Even though the rate might
fluctuate but the overall population is increasing over time. Here, we can see an upward trend of
the world population.

Irregular or random variations are referred to as the blips in the data set caused by chance and
unusual situations and do not follow any noticeable pattern. These occur on a random or irregular
basis and that’s why it is referred to as irregular or random variations. If we consider the trend of
the world population, the incidence of Spanish Flue in 1912 could be referred to as a random
variation, since due to this epidemic the world population went down. However, the overall trend
is not downward rather upward. Hence it created a blip in the trend of the world population.
 Name: Farhan Zubair
ID: 181 640 52……..

Section 02
Question 1:

Answer:

a. Moving average is the technique to take the average of n periods to forecast the data for
the next period. It is usually used if the demand or data remains fairly steady over time.

𝑆𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑑𝑒𝑚𝑎𝑛𝑑𝑠 𝑜𝑓 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠

Moving average =
𝑛

Weighted moving average is the technique to assign weights to the most recent values rather than
the older values. This technique is more plausible if the data follows a trend. The higher weight
assigned to the most recent data reflects any changes in the data.

𝑆𝑢𝑚 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑜𝑓 𝑤𝑒𝑖𝑔ℎ𝑡 𝑎𝑛𝑑 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠

Weighted Moving average =
𝑠𝑢𝑚 𝑜𝑓 𝑤𝑒𝑖𝑔ℎ𝑡𝑠

Period Data
January 60
February 62
March 65
April 64

Using four months moving average, we get the forecasted demand for May as,

60+62+65+64
= = 62.75
4

By assigning weight of 4, 3, 2 & 1 to the months from most recent to the 1st. we forecast the
1(60)+2(62)+3(65)+4(64)
demand for May as = = 63.5
10
 Name: Farhan Zubair
ID: 181 640 52……..

b. (i)

Sales Demand Average two year Average monthly Seasonal

Month Yr 1 Yr 2 Demand demand index
Jan 185 190 187.5 196.92 0.95
Feb 180 170 175 196.92 0.89
Mar 190 190 190 196.92 0.96
Apr 200 198 199 196.92 1.01
May 210 225 217.5 196.92 1.10
Jun 215 215 215 196.92 1.09
Jul 205 200 202.5 196.92 1.03
Aug 200 204 202 196.92 1.03
Sep 195 195 195 196.92 0.99
Oct 190 215 202.5 196.92 1.03
Nov 188 195 191.5 196.92 0.97
Dec 186 185 185.5 196.92 0.94
Total 2344 2382 2363

(ii) Considering last two years’ demands as follows:

Year (X) Demand (Y)

1 2344
2 2382

Then we can find the least square regression line as follows:

y = a+ bx

Year (X) Demand (Y) XY x^2

1 2344 2344 1
2 2382 4764 4
Total 3 4726 7108 5
Average 1.5 2363

7108−2(1.5)(2363)
b= = 38
5−2(1.5)2

a=2363-38(1.5) = 2306

So, Y = 2306+38x
 Name: Farhan Zubair
ID: 181 640 52……..

So the third year demand is = 2306 + 38 (3) = 2420

(iii)

(iv)
 Name: Farhan Zubair
ID: 181 640 52……..

(v)

Rounded of
Annual Seasonal monthly forecast
Month Forecast Index Number of months for 3rd year
Jan 2420 0.95 12 192.02
Feb 2420 0.89 12 179.22
Mar 2420 0.96 12 194.58
Apr 2420 1.01 12 203.80
May 2420 1.10 12 222.75
Jun 2420 1.09 12 220.19
Jul 2420 1.03 12 207.38
Aug 2420 1.03 12 206.87
Sep 2420 0.99 12 199.70
Oct 2420 1.03 12 207.38
Nov 2420 0.97 12 196.12
Dec 2420 0.94 12 189.97

Question 02:

Answer: (a) Economic Order Quantity refers to the order quantity that minimizes the inventory
costs including carrying cost, shortage cost and order costs.

Economic Production quantity considers setup costs instead of carrying cost and been initiated
from production. This is the model in which the production level is determined to make the
inventory cost optimum. Basically this model refers to the production process which is tied to the
demand of the finished products.

(b) D = 700

A = 15

h = 12(0.1) = 1.2

2(15)(700)
(i) Q=√ = 132
1.2

(ii) Minimum total cost per year = √2(15)(700)(1.2) = 159

(iii) Minimum number of orders = 700/132 = 5.30 ≈ 6
Cycle time in day = 350/6 = 58
 Name: Farhan Zubair
ID: 181 640 52……..

(iv) Reorder point = 700 (4)/350 = 8

(c) S = 18, P = 1200

2(18)(700)
(i) Q = √ 700 = 224
1.2(1−1200)

700
18(700) 1.2(224)(1−1200)
Total cost = + = 112
224 2

350
(ii) Cycle time in days = 700 = 112
( )
224

Question 03

Answer: (a) FC = 8000, VC = 70, R = 110

QBEP = 8000/ (110-70) = 200; hence 200 units of foods need to be sold in order to attain break
even

(b) BEP for one machine = 5500 /(70-40) = 183

BEP for two machines = 8500 / (70-40) = 283

BEP for three machines = 12000/ (70-40) = 400

BEP for four machines = 16000 / (70-40) = 533

Projected demand is between 600 and 850 units. BEP for 3 machines is 400 units and it has
maximum production range of 800 which can support the demand till 800. However, for four
machines, the BEP is 533 and the maximum production range is 1000 which is much higher
than the maximum total demand of 850 units. On the other hand, two machines’ BEP is 283
and can support demand till 500 units with more demand to satisfy. Hence, the manager should
purchase 3 machines.