Thomas Kratzer is the purchasing manager for the headquarters of a large insurance company

chain with a central inventory operation. Thomas’s fastest moving inventory item has a demand
of 6,000 units per year. The cost of each unit is $100, and the inventory carrying cost is $10 per
unit per year. The average ordering cost is $30 per order. It takes about 5 days for an order to
arrive, and the demand for 1 week is 120 units. (This is a corporate operation, and there are 250
working days per year.)
a) What is the EOQ?

2 DS
EOQ=
√ H

2(6000)(30)
EOQ=
√ 10
=√36000 = 189.74 190 units

b) What is the average inventory if the EOQ is used?

Q 189.74
Average Inventory= = = 94.87 Units 95 units
2 2
c) What is the optimal number of orders per year?
D 6000
¿ = =31.62 optimal orders per year
Q 189.74
d) What is the optimal number of days in between any two orders?
working days per year 250
= =7.91 optimal number of days between orders
number of orders 31.62
e) What is the annual cost of ordering and holding inventory?

( QD ) S+( Q2 ) H=( 189.74

6000
) 30+( 189.74
2 )
10=$ 1897.37

f) What is the total annual inventory cost, including the cost of the 6,000 units?
= $1897.37 + 6000(100) = $601,897.37

Lead time for one of your fastest- moving products is 21 days. Demand during this period
averages 100 units per day.
a) What would be an appropriate reorder point?
Reorder = Avg. daily use * lead time
Reorder point = 100*21
Reorder point is 2100 units
b) How does your answer change if demand during lead time doubles?
Reorder point = 200*21
Reorder point is 4200 units
c) How does your answer change if demand during lead time drops in half?
Reorder point = 50*21
Reorder point is 1050 units

12.27 Barbara Flynn is in charge of maintaining hospital supplies at General Hospital. During the
past year, the mean lead time demand for bandage BX- 5 was 60 (and was normally distributed).
Furthermore, the standard deviation for BX- 5 was 7. Ms. Flynn would like to maintain a 90%
service level.
a) What safety stock level do you recommend for BX- 5?
Lead time = 60 Standard dev = 7
90% service level = 7*[60(at 0.90)] = 7*1.28 = 8.96 = 9
b) What is the appropriate reorder point?
Reorder point = 60+9 = 69 bandages

Chicago’s Hard Rock Hotel distributes a mean of 1,000 bath towels per day to guests at the pool
and in their rooms. This demand is normally distributed with a standard deviation of 100 towels
per day, based on occupancy. The laundry firm that has the linens contract requires a 2- day lead
time. The hotel expects a 98% service level to satisfy high guest expectations.
a) What is the safety stock?
= Z∗σ dLT = 2.05*141.42 = 289.91 290 is the safety stock
b) What is the ROP?
ROP = (average daily demand * lead time in days) + zσdLT

σ dLT =σ d∗√lead time=100∗√ 2=100∗1.4142 = 141.42 towels

 = (1000*2) + 2.05*141.42
= 2000 + 289.91 = 2289.9 towels 2290 towels is the reorder point
12.16 Race One Motors is an Indonesian car manufacturer. At its largest manufacturing facility,
in Jakarta, the company produces subcomponents at a rate of 300 per day, and it uses these
subcomponents at a rate of 12,500 per year (of 250 working days). Holding costs are $2 per item
per year, and ordering costs are $30 per order.

a. What is the economic production quantity?

2 D∗S 2(12500)∗30
EPQ=

√ d
H∗[ 1− ]
p
=

√2∗[1−
50
300
]
= √ 450000=670.8 671 EPQ

b. How many production runs per year will be made?

D 12500
= Q
=
671 = 18.6 19 runs

c. What will be the maximum inventory level?

T = Q/p = 671/300 = 2.236

Max inv. Lvl = (p-d)t = (300-50)*2.236 = 559.16

d. What percentage of time will the facility be producing components?

% producing = (2.239*19)/250 = .1699 16.99% of the time

e. What is the annual cost of ordering and holding inventory?

Annual holding cost = HQ(1-d/p) = 2*671(1-50/300) = $1118.33

Annual ordering cost = H(Q/2)(1-d/p) = 2-(671/2)*(1-50/300) = $558.86 ordering cost
12.19 Cesar Rego Computers, a Mississippi chain of computer hardware and software retail
outlets, supplies both educational and commercial customers with memory and storage devices.
It currently faces the following ordering decision relating to purchases of very high-density
disks:

S
hould the discount be taken?

Without Discount:

EOQ  (2 36,000 25) / 0.45 2,000 units.

The total costs at this quantity are:

Holding cost  Q/2  H  1,000  .45  $450

Ordering cost  D/Q  S  36,000/2,000  25  $450

Purchase cost  D  P  36,000  0.85  $30,600

Total cost  $900  $30,600  $31,500

At the discount for quantity:

Holding cost  Q/2  H  3,000  .45  $1,350

Ordering cost  D/Q  S  36,000/6,000  25  $150

Purchase cost  D  P  36,000  0.82  $29,520

Total cost  $1,500  $29,520  $31,020

Take the discount they will save $480