School of Industrial Engineering & Management (IEM) Inventory Management

International University, VNU-HCM Instructor: Dr. Nguyen Van Hop

Homework 2_Chapter 2 (continued)

Deadline: Class Day next week

Name: Đào Ngọc Thùy Linh

ID: IELSIU19187
Class: Thursday Afternoon

I. Problem statement:

1. Quantity discount model:

- Assumption: Demand is constant, suppliers give quantity discount policy.
- Decision variable: Optimal order quantity Q given demand rate, associated cost
(ordering, holding, unit cost,..), discount policy
- Method: Cost minimization (exact analysis)
2. Backorder model:
- Assumption: When demand is unsatisfied, customers place order and wait
(backordering), EOQ assumptions are in place
- Decision variable: Optimal ordering size Q* and optimal backorder level S* given as
EOQ model adding shortage cost per unit per year �� and shortage administration cost
per unit ��
- Method: Cost minimization (exact analysis)

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 II. Homework:

Problem 1: Input data of AAC in excel for the case of discount

Definition Parameter Value Unit
Ordering cost (20 minutes to check labor cost $12/hour) C0 12 $/order
Production cost/ Price C 10 $/item
Holding cost rate (10% of annual interest+ 4%
miscellaneous) H 14% $/$/year
Holding cost Ch 1.4 $/unit/year
Average demand D 6240 items/year
Assume that the supplier offers for orders having the quantity from the levels of 500 units,
the discount price will be to the levels of 0.5 USD. Observe the results and explain.

Explain & Comment: According to the Total Cost, AAC should choose the optimal quantity
327 units. But if AAC have more budget, they should choose the option 2 with the quantity
500 units because the cost per unit is lower than that of option 1. (5249.55/500=10.5 <
3746.74/327=11.5)

Problem 2: Input data of SCANLON in excel and change the lead time to be longer, observe
the results and explain
 Lead time 4 weeks

 Lead Time 6 weeks

 Lead Time 8 weeks

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Explain & Comment: Changing Lead Time does not impact on the Order Quantity,
Backoder, Cycle Time, Number of orders, TV, TC.
It impacts on Reorder Point, Lead Time increases, ROP increases.

Problem3: A manufacturing firm located in Calgary produces an item in a 3-month time

supply. An analyst, attempting to introduce a more logical approach to selecting run
quantities, has obtained the following estimates of the characteristics of the item: Demand
rate at 4,000 units/year (assumed constant), fixed ordering cost is $5, unit variable cost is
$4 per 100 units, carrying rate is at 0.25 $/unit/year
Note: Assume that the production rate is much larger than D.
D = 4,000 units/year
Co = $5
Price = $4/100 units
Ch = 0.25*4/100 = $0.01/unit/year
a/ What is the optimal order quantity?
2∗�∗�� 2∗4000∗5
Q* = �ℎ
= 0.01
= 2000 �����

b/ What is the time between consecutive replenishments of the item when the EOQ is used?
�∗ 2000
Cycle time T = � = 4000 = 0.5 ���� = 26 ����� = 6 months
Number of orders per year is 4,000/2,000 = 2 orders

c/ The production manager insists that the fixed ordering cost A ($5) figure is only a guess.
Therefore, he insists on using his simple 3-month supply rule. Indicate how you would find
the range of A values for which the optimal order quantity EOQ (based on A = $5) would be
preferable (in terms of a lower total of replenishment and carrying costs) to the 3-month
supply?

Using 3-month supply rule => Q = 4,000/4 = 1,000 units

Cycle time T = 3 months; N = 4 times
TV cost of EOQ = 2000*0.01/2+4000*Co/2000
TV of 3-month supply rule = 1,000*0.01/2+4,000*Co/1,000
Equating the TV of EOQ and 3-month supply rule:
2000*0.01/2+4000*Co/2000 = 1,000*0.01/2+4,000*Co/1,000
10 + 2Co = 5 + 4Co
=> Co = 2.5$ (the range ordering cost values is preferable)

Problem 4: The famous Ernie of “Sesame Street” continually faces replenishment decisions
concerning his cookies supply. The Cookie Monster devours D the cookies at an average
rate of 200 per day. The P cookies cost $0.03 each. Ernie is getting fed up with having to go

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to the store T once a week. His friend, Bert, has offered to do a study to help Ernie with his
problem.
D = 200/day => Q/week=1,400 P = $0.03/unit T = 1 week
a/ If Ernie is implicitly following an EOQ policy, what can Bert say about the implicit values
of the two missing parameters?

Fixed ordering cost is transportation + fuel

Holding cost is space cost + cost of utilities

b/ Suppose that the store offered a special of 10,000 cookies for $200. Should Ernie take
advantage of the offer? Discuss

10,000 cookies for $200 => $0.02/unit

The quantity of cookie needs to be bought every week is 1,400 cookies
Buying 10,000 cookies which covers approximately 7 weeks.
It depends on Holding cost, Ordering cost and date of items. Cookies can be over the date
before consuming.

Problem 5: A supplier offers the following discount structure on purchases of any single item:

0 < � < 1000 $5.00 per unit

1000 ≤ � $4.90 per unit
< 2000
2000 ≤ � $4.75 per unit
The discounts apply to all units. For each of the following items treated separately, what is
the appropriate order quantity to use, assuming a common value of � = 0.30 $/unit/yr?
Item Demand � (units/ Ordering cost A
year) ($)
1 10,000 25
2 1,000 25
3 4,000 25
4 130,000 25

 Item 1: D = 10,000

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  Item 2: D = 1,000

 Item 3: D = 4,000 units

 Item 4: D = 130,000 units

Problem 6: Suppose that the demand for a product is 30 units per month and the items are
withdrawn at a constant rate. Each item carries a variable cost of $3 per item. The ordering
cost each time a purchasing order trigger is $20, and the inventory holding cost is $0.30
$/unit/month. If shortages are allowed but cost $2 per item per month, and $1 for
backorder administration. The supplier takes 2 weeks for the product to be at the customer
door.
Determine how often to make an order and what size it should be?

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T = 0.1883 year = 9.8 weeks => Every 9.8 weeks we make the order with quantity of 67.8
units.