Question 1 (15 points)

Suppose you operate a store. The weekly average demand for an item sold in your store
is 20 units. Your upstream supplier charges $100 for each item sold to you. The annual
holding cost is 20% of the item cost. It costs $160 to place an order. The lead time is 1
week and your store operates 50 weeks per year.
(a) What is the optimal order quantity?
Answer:
D = 20 ´ 50 = 1000 units
2 ´ 1000 ´ 160
Qopt = = 126.49 » 127 units
0.2 ´ 100
(b) Suppose you want to achieve a 95% service level during the lead time, and the
weekly demand is normally distributed with a mean of 20 units and standard
deviation of 10 units. What will be your reorder point? What will be the safety stock
level? What is your average inventory?
Answer:
Safety stock level SS = 1.645 ´ 10 = 16.45 » 17 units (2 points, round up or not are
both fine)
Reorder point R = 20 ´ 1 + 1.645 ´ 10 = 36.45 » 37 units (2 points, round up or not are
both fine)
average inventory=Q/2+SS=126.46/2+16.45=79.68 or 80 (1 point, round up or not
are both fine, If student used 127/2+17 then it would be 81, this is correct as well.)

for the average inventory, if the student includes pipeline inventory, the answer would be
average inventory = Q/2+SS+D*LT=126.46/2+16.45+20*1=99.68 or 100
(c) Suppose you want to achieve a 95% service level during the lead time, and the
distribution of weekly demand is listed in the following table. What will be your
reorder point? What will be the safety stock level?
Number of units Probability
15 0.01
16 0.03
17 0.08
18 0.1
19 0.18
20 0.26
21 0.14
22 0.07
23 0.05
24 0.04
25 0.04
Answer:

1
mLT=15*0.01+…+25*0.04=20 units, alternatively students can get the m_LT=20 directly
from the question description.
Prob (dLT <= 23) = 0.92
Prob (dLT <= 24) = 0.96
R = 24 units
SS = R –mLT =24-20 = 4 units
Question 2
(15 points)
A manufacturer keeps a continuous inventory review system on the key component, part
X. The annual demand on part X is 12,000 units and the demand rate is constant. The
supplier charges $50 for each unit of part X. Each order costs $150 to process and annual
holding cost per unit is 20% of the purchase price.

(a) What is the economic order quantity? How many orders will be placed each year
(365 days)? If the lead time is 3 days, what is the reorder point?
Answer:
2 ´ 12000 ´ 150
Qopt = = 600 units
50 ´ 0.2
Number of orders = 12000/600 = 20 orders
d = 12000 / 365 = 32.88units
R = 32.88 ´ 3 = 98.64 » 99 units

(b) The supplier plans to offer discount on large orders in the following way:
Order quantity (units) Price per unit
0 to 800 $50
800 or more $45
Find out the optimal order quantity.

Answer:
2 ´ 12000 ´ 150
For $50: Qopt = = 600units (feasible)
50 ´ 0.2
2 ´ 12000 ´ 150
For $45: Qopt = = 632.46 » 633units (infeasible
45 ´ 0.2
à consider 800 units
12000 600
TC (600) = 50 ´ 12000 + ´ 150 + ´ 0.2 ´ 50 = 600000 + 3000 + 3000 = $606000
600 2
12000 800
TC (800) = 45 ´ 12000 + ´ 150 + ´ 0.2 ´ 45 = 540000 + 2250 + 3600 = $545850
800 2

Optimal order quantity = 800 units