Management Analytics 1

Global MBA
Ou Tang October 2014

Seminar materials
Inventory 1 (from Cachon and Terwiesch)

(Powered by Koffee) Powered by Koffee (PBK) is a new campus coffee store. PBK uses 50
bags of whole bean coffee every month, and you may assume that demand is perfectly steady
throughout the year.

PBK has signed a year-long contract to purchase its coffee from a local supplier, Phish
Roasters, for a price of $25 per bag and an $85 fixed cost for every delivery independent of
the order size. The holding cost due to storage is $1 per bag per month. PBK managers
figure their cost of capital is approximately 2 percent per month.

a) What is the optimal order size, in bags?

b) Given your answer in (a), how many times a year does PBK place orders?

c) Given your answer in (a), how many months of supply of coffee does PBK have on
average?

d) On average, how many dollars per month does PBK spend to hold coffee (including cost
of capital)?

Suppose that a South American import/export company has offered PBK a deal for the next
year. PBK can buy a years' worth of coffee directly from South America for $20 per bag and
a fixed cost for delivery of $2,000. Assume the estimated cost for inspection and storage is
$1 per bag per month and the cost of capital is approximately 2 percent per month.

e) Should PBK order from Phish Roasters or the South American import/export company?

Quantitatively justify your answer.

Inventory 2 (from Cachon and Terwiesch)

(Beer Distributor) A beer distributor finds that it sells on average 100 cases a week of regular
12-oz. Budweiser. For this problem assume that demand occurs at a constant rate over a 50-
week year. The distributor currently purchases beer every two weeks at a cost of $8 per case.
The inventory-related holding cost (capital, insurance, etc.) for the distributor equals 25
percent of the dollar value of inventory per year. Each order placed with the supplier costs
the distributor $10.This cost includes labor, forms, postage, and so forth.

a) Assume the distributor can choose any order quantity it wishes. What order quantity
minimizes the distributor's total inventory-related costs (holding and ordering)?
 For the next three parts, assume the distributor selects the order quantity specified in part (a).

b) What are the distributor's inventory turns per year?

c) What is the inventory-related cost per case of beer sold?

d) Assume the brewer is willing to give a 5 percent price discount if the distributor orders
600 cases or more at a time. If the distributor is interested in minimizing its total cost (i.e.,
purchase and inventory-related costs), should the distributor begin ordering 600 or more
cases at a time?

Inventory 3

Company M2 supplies bike CitySpeed to a market through a simple supply chain consisting
of a warehouse and a retailer shop. The price of CitySpeed at the retailer site is 6900
SEK/unit and at the warehouse site 3600 SEK/unit. The ordering costs are 15000 and 4000
SEK at warehouse and retailer sites, respectively. The average weekly demand is 200 units.
Both warehouse and retailer open 50 weeks over one year. The inventory holding cost is 0.18
SEK/SEK/year.

a) Calculate the optimal ordering sizes at retailer and warehouse.

b) Calculate the ordering cost and inventory holding cost in the system.

Inventory 4

Company 6M produces products X, Y and Z in the same production line. All products have a very
constant demand. This gives the manager a motivation to apply the cyclic planning approach to
schedule the production. The demand, cost and setup time information are given in the table below.
A week includes 40 working hours (5 days per week with 8 hours per day).

Product X Y Z
Demand (Units/week) 200 350 750
Setup time (hours) 2 2 1
Setup cost (SEK) 1400 650 450
Operation time (hours/unit) 0.02 0.01 0.02
Inventory holding cost (SEK/unit/week) 1.5 1 2

a) Determine the optimal cycle time, using common cycle approach. The cycle time should be
rounded up to a day (W = 0.2, 0.4, 0.6 …weeks)
b) Estimate the inventory related costs
Newsvendor 1

Vivo Bakery bakes fresh Danish pastry each morning. The daily demand is a random variable
with a distribution which is estimated from previous sales experience

Demand Probability
0 0.05
50 0.10
100 0.10
150 0.20
200 0.30
250 0.10
300 0.10
350 0.05
The Danish pastry costs 1 SEK to make and will be sold at the price of 4.5 SEK. At the end
of the day the unsold pastry will be dumped and it costs on average 0.2 SKE/pastry.

a) What is the optimal batch size?

b) Now Vivo Bakery can sell the pastry to a farmer at the price of 0.7 SEK at the end of
the day, what is the solution then?

Newsvendor 2 (from Cachon and Terwiesch, modified)

(McClure Books) Dan McClure owns a thriving independent bookstore in artsy New Hope,
Pennsylvania. He must decide how many copies to order of a new book, Power and Self-
Destruction, an exposé on a famous politician's lurid affairs. Interest in the book will be
intense at first and then fizzle quickly as attention turns to other celebrities. The book's retail
price is $20 and the wholesale price is $12. The publisher will buy back the retailer's leftover
copies at a full refund, but McClure Books incurs $4 in shipping and handling costs for each
book returned to the publisher. Dan believes his demand forecast can be represented by a
normal distribution with mean 200 and standard deviation 80.

a) Dan will consider this book to be a blockbuster for him if it sells more than 400 units.
What is the probability Power and Self-Destruction will be a blockbuster?

b) Dan considers a book a “dog” if it sells less than 50 percent of his mean forecast. What is
the probability this exposé is a “dog”?

c) What is the probability that demand of this book is within 20 percent of the mean forecast?

d) What order quantity maximizes Dan's expected profit (or minimize the cost)? What are
the expected total overage and underage costs?

e) What is the order quantity if Dan wants to achieve a 95 percent in-stock probability?

f) If Dan orders the quantity chosen in part f to achieve a 95 percent in-stock probability,
then what is Dan's expected profit be in this case?

g) What order quantity should he choose to satisfy a 95 percent fill rate?

Queueing 1

Machine Universal is used in a job shop for processing different items in company XYZ.
New job arrives in a Poisson process with arrival rate 18 per hour. The processing time
varies depending on the complexity of the job and the historical data shows it close to an
exponential distribution. In addition, each job takes on average 3 minutes to complete once
it is put into the machine. The priority rule is FCFS.

a) What is the average WIP inventory in this machine?

b) What is the average throughput time?
c) What is the percentage of queuing time?

Apparently the manager in company XYZ is not satisfied with the job shop performance.
New machines will be purchased in order to increase the capacity in the job shop. There are
two alternatives, either i) buy a second machine Universal or ii) replace it with a new model
Universal II so that the process speed will be doubled. (???? Need to be modified here)

d) Compute the expected waiting times in these two alternatives.

e) Which alternative is your suggestion? Comment it.

Queueing 2

In a hospital emergency room, the arrival time and treatment time of patients can both be
considered as exponentially distributed. The arrival rate is λ=2 patients/hour and service rate
is µ=3 patients/hour.

a) What is the most important performance measure in this case

b) In the moment we have only one doctor. What will be the average waiting time?
c) What happens if we now have two doctors?

In such a hospital emergency room, the patients are in fact not treated on a first-come-first-
served basis. Rather the admitting nurse will divide the patient into three categories: (1)
critical cases, where prompt treatment is vital for survive; (2) serious case, where early
treatment is important to prevent further deterioration; and (3) stable case, where treatment
can be delayed without adverse medical consequences. Patients are then treated in this order
of priority, where those in the same category are normally taken on a first-come-first-served
basis. Approximately 10%, 30% and 60% of the patients fall into the first, second and third
categories respectively. Because more serious cases will be sent to the hospital for further
care after emergency treatment, the average treatment in the emergency does not differ
greatly among these categories. calculate the expected waiting time when there is one or two
doctors on duty respectively.

d) If a doctoral will interrupt treatment when a patient with higher-priority arrives, repeat
the questions in b) and c).
Network 1 (from Chopra and Meindl)

Sleekfon and Sturdyfon are two major cell phone manufacturers that have recently merged.
Their current market sizes are as shown in Table A. All demand is in millions of units.

Table A. Global demand and duties for Sleekfon and Sturdyfon

Europé
N. S. Europé (Non Rest of
Market Amercia Amercia (EU) EU) Janpan Asia/Australia Africa

Sleekfon demand 10 4 20 3 2 2 1

Sturdyfon demand 12 1 4 8 7 3 1

Import duties (%) 3 20 4 15 4 22 25

Sum demand 22 5 24 11 9 5 2

Sleekfon has three production facilities in Europe (EU), North America, and South America.
Sturdyfon also has three production facilities in Europe (EU), North America, and Rest of
Asia. The capacity (in millions of units), annual fixed cost (in millions of $), and variable
production costs($ per unit) for each plant are as shown in Table B.

Table B. Plant capacities and costs for Sleekfon and Sturdyfon

Plant capacities and Fixed variable
costs Capacity cost/year cost/unit

Sleekfon Europé (EU) 20 100 6,00

N. Amercia 20 100 5,50

S. Amercia 10 60 5,30

Sturdyfon Europé (EU) 20 100 6,00

N. Amercia 20 100 5,50

Rest of Asia 10 50 5,00

Transportation costs between regions are as shown in Table C. All transportation costs are
shown in $ per unit.
 Table C. Transportation costs between regions
N. Europé Europé Rest of
Amercia S. Amercia (EU) (Non EU Janpan Asia/Australia Africa

N. Amercia 1,00 1,50 1,50 1,80 1,70 2,00 2,20

S. Amercia 1,50 1,00 1,70 2,00 1,90 2,20 2,20

Europé (EU) 1,50 1,70 1,00 1,20 1,80 1,70 1,40

Europé (Non EU) 1,80 2,00 1,20 1,00 1,80 1,60 1,50

Janpan 1,70 1,90 1,80 1,80 1,00 1,20 1,90

Rest of
Asia/Australia 2,00 2,20 1,70 1,60 1,20 1,00 1,80

Africa 2,20 2,20 1,40 1,50 1,90 1,80 1,00

Duties are applied on each unit based on the fixed cost per unit capacity, variable cost per
unit, and transportation cost. Thus a unit currently shipped from North America to Africa
has a fixed cost per unit of capacity of $5.00, a variable production cost of $5.50, and a
transportation cost of $2.20. The 25 percent import duty is thus applied on $12.70 (5.00 +
5.50 + 2.20) to give a total cost on import of $15.90.

For the questions below, assume that market demand is as in Table A. The merged company
has estimated that scaling back a 20million-unit plant to 10 million units saves 30 percent in
fixed costs. Variable costs at a scaled-back plant are unaffected. Shutting a plant down (either
10 million or 20 million units) saves 80 percent in fixed costs. Fixed costs are only partially
recovered because of severance and other costs associated with a shutdown.

a) What is the lowest cost achievable for the production and distribution network prior to
the merger? Which plants serve which markets?

b) What is the lowest cost achievable for the production and distribution network after the
merger if none of the plants is shut down? Which plants serve which markets?

c) What is the lowest cost achievable for the production and distribution network after the
merger if plants can be scaled back or shut down in batches of 10 million units of capacity?
Which plants serve which markets?

d) How is the optimal network configuration affected if all duties are reduced to 0?

e) How should the merged network be configured?

Contracting 1

Vendor is selling Toys to Buyer. The setup cost in prduction, paid by the vendor, is 3000
SEK. The trasportation cost, paid by the buyer is 200 SEK. Demand is 160000 per year and
the holding cost rate is 15% per year. Buyer also pays 45 SEK for each product purchased.
Production order is released based on Lot for lot policy.

a) If a centralised decision has been made, what is the optimal order quantity?

b) If a decentralised decision is made, what is the optimal order quantity?

c) What is the channel efficiency?

d) What is the price discount range?

e) In order to improve the maximum channel efficieny, what should be the discount contract?
What is the cost then?

f) If vendor can sign a consignment contract with the buyer (vendor will pay the inventory
holding cost), what would be the optimal order quantity? What is the total cost?

Contracting 2 (modified from Cachon and Terwiesch)

Zamatia is an Italian upscale maker of eyewear. UV Inc., short for Umbra Visage, is one of
their retailers in the United States. To match UV's stylish assortment, UV only operates small
boutique stores located in trendy locations. We focus on one of their stores located in Miami
Beach, Florida. Zamatia manufactures its sunglasses in Europe and Asia, so the
replenishment lead time to the United States is long. Furthermore, the selling season for
sunglasses is short and styles change significantly from year to year. As a result, UV receives
only one delivery of Zamatia glasses before each season. As with any fashion product, some
styles sell out quickly while others are left over at the end of the season.

Consider Zamatia's entry-level sunglasses for the coming season, the Bassano. UV purchases
each one of those pairs of sunglasses from Zamatia for $75 and retails them for $115.
Zamatia's production and shipping costs per pair are $35. At the end of the season, UV
generally needs to offer deep discounts to sell remaining inventory; UV estimates that it will
only be able to fetch $25 per leftover Bassano at the Miami Beach store. UV's Miami Beach
store believes this season's demand for the Bassano can be represented by a normal
distribution with a mean of 250 and a standard deviation of 125.

a) Calculate the ordering quantity which should maximizes the profit (or minimizes the cost)
of UV.

b) Calculate the profits for UV, Zamatia and the total channel.

c) What is the channel efficiency?

Zamatia would like to encourage UV to order more Bassano sunglasses. One solution is for
Zamatia to buy back from UV all leftover sunglasses for a full refund of $75 per pair; that is,
Zamatia could offer UV a buy-back contract. Unfortunately, buy-back contracts introduce
new costs to the supply chain. In particular, UV must ship leftover inventory back to
Zamatia, which it estimates costs about $1.50 per pair. And then Zamatia is able to sell the
leftover inventory in an outlet to earn $26.50 per Bassano at the end of the season.

d) Repeat the calculation of a. b. and c. and compare the results.

Instead of giving a full refund on returned inventory, Zamatia could also give a partial refund.
For example, suppose Zamatia offers to buy back inventory from UV for $65 per pair.
Other conditions remain unchanged.

e) Repeat the calculation of a. b. and c. and compare the results.