Professor Lijian Lu Fall 2021

ISOM2700 Operations Management

Practice Questions Set #5

1. (Forecasting) Historical demand for a product is

Demand
January 12
February 11
March 15
April 12
May 16
June 15

a. Using a weighted moving average with weights of 0.6, 0.3, and 0.1, find the July forecast.

b. Using a simple three-month moving average, find the July forecast.

c. Using an exponential smoothing with 𝛼 = 0.2 and a June forecast = 13, find the July forecast. Make
whatever assumptions you wish.

d. Using simple linear regression analysis, calculate the regression equation for the preceding demand data.

e. Using the regression equation in d, calculate the forecast for July.

 ISOM2700 Practice Questions Set 5

2. (Forecasting) Harlen Industries has a simple forecasting model: Take the actual demand for the same month
last year and divide that by the number of fractional weeks in that month. This gives the average weekly
demand for that month. This weekly average is used as the weekly forecast for the same month this year. This
technique was used to forecast eight weeks for this year, which are shown below along with the actual demand
that occurred. The following eight weeks show the forecast (based on last year) and the demand that actually
occurred:

Week Forecast Actual

1 140 137
2 140 133
3 140 150
4 140 160
5 140 180
6 150 170
7 150 185
8 150 205

a. Compute the MAD.

b. Compute the tracking signal.

c. Based on your answers to a and b, comment (in one sentence) on Harlen’s method of forecasting.

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3. (EOQ)

Ace Airline has a need for 100 new flight attendants per month as replacements for those who leave. Trainees are
put through a two-month school for training. The fixed cost of running one session of this school is $150,000,
regardless of the class size. Any number of sessions can be run during the year, but must be scheduled so that the
airline always has enough flight attendants. The cost of having excess attendants is simply the salary that they receive,
which is $15,000 per month. (Excess attendants are those who have completed training, are being paid, but have not
yet been assigned a job.)
, H = 15000*12 = 180000.

a. What is the optimal class size for each session?

b. Optimal Q = QEOQ = (2*S*D/H)1/2 = 44.7 or 45. (You may round it up to 45 or down to 44. Both will be fine.
Or

b. How many sessions of the school should Ace Airline run each year?
d. Sessions per year D/Q = 1200/45 = 26.7

c. What is the time interval between two sessions?

Time between sessions = Q/D = 45/1200 = 0.0375 years = 13.69 days = about 2 weeks.

*For (2) and (3), if the reasoning/formula was right, and value of D was also right, but you got the wrong results
due to the wrong value of Q, you can also get partial credit.

4. (EOQ)

Campus Publishing prints textbooks written by faculty and distribute around the world. The Business English book
is particularly popular and has annual sales of 100,000 copies per year. Printing each copy of the book costs $60.
The author is encouraged to come up with revisions (i.e., new editions) to cater to consumer needs. Each revision
will require $250,000 for a new typeset of the book. After a new edition is released, its sales value is discounted at
a rate of $2 every 3 months. How frequently should new editions be published?

Given:

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5. (EOQ)

The annual demand for a product is 15,600 units. The weekly demand is 300 units with a standard deviation of 90
units. The cost to place an order is $31.20, and the time from ordering to receipt is four weeks. The annual inventory
carrying cost is $0.10 per unit.

a. Find the reorder point necessary to provide a 98 percent service probability.

b. Suppose the production manager is asked to reduce the safety stock of this item by 50 percent. If she does
so, what will the new service probability be?

If the safety stock is reduced by 50 percent, then the new safety stock (ss) is 185 units.
ss = z*𝜎𝐿 => z = ss/𝜎𝐿 = 185/180 = 1.03, so the service probability is 84.8%

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6. (EOQ - Safety stock)

Consider a retailer who plans to expand his business in a new city. He can choose to build a flagship store to serve
the entire city; or he can build 2 regional branch stores, each serving its own region. Weekly demand in region 1 is
normally distributed with mean 2,000 and standard deviation 400. Weekly demand in region 2 is normally
distributed with mean 800 and standard deviation 100. The lead time for both regions is 2 weeks. Assume a target
level CSL of 0.95.

a. How much safety stock will the retailer have to hold if he builds 2 regional stores?

Total safety stock = 930.5 + 232.6 = 1163.1

b. How does the safety stock requirement change if the retailer uses a central flagship store?
Safety

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7. (Newsvendor)

A retailer sells a fashion product during a short sales season. Since there is a long production lead time, the retailer
needs to purchase the product in advance and no further inventory replenishment is allowed. The product costs $70
per unit and the retail price is $100. For units that are not sold by the end of the main sales season, the retailer can
sell the leftover units at a discounted price $30 through clearance sales. The demand is uncertain and the demand
distribution is forecasted as follows.

Demand (units) 500 350 250 150

Probability 0.2 0.4 0.25 0.15

a. What is the underage cost cu?

Cu= p – c = 100 – 70 = $30

b. What is the overage cost co?

Co= c – s = 70 – 30 = $40
c. How many units should the retailer purchase in order to maximize the expected profit?

Critical fractile = 30/0+40) = 0.4286

Q* = 3

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8. (Newsvendor)

Elite Couture, a high-end fashion goods store has to decide on the quantity of Luella Bartley handbags to sell
during the Christmas season. The unit cost of the handbag is $28.50 and the handbag sells for $150. All handbags
remaining unsold at the end of the season are purchased by a discounter for $20 each. Further, there is a significant
40% inventory holding cost incurred for each unsold bag. Demand for bags is distributed normally with mean 150
and standard deviation 20. How many bags should be purchased to maximize expected profit?

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9. (Newsvendor)

Tom owns a small firm that manufactures “Tom Sunglasses.” He has the opportunity to sell a particular seasonal
model to Land’s End. Tom offers Land’s End two purchasing options:

• Option 1. Tom offers a price of $55 for each unit, but returns are no longer accepted. In this case, Land’s
End throws out unsold units at the end of the season.
• Option 2. Tom offers to set his price at $65 and agrees to credit Land’s End $53 for each unit Land’s End
returns to Tom at the end of the season.

This season’s demand for this model will be normally distributed with mean of 200 and standard deviation of 125.
Land’s End will sell those sunglasses for $110 each.

a. How much would Land’s End buy if they choose option 1?

,125) = 200.

b. How much would Land’s End buy if they choose option 2? What is the probability that Land’s End will
return sunglasses to Tom at the end of the season?
Cu = 110-65=45

0.789

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10. (Newsvendor)

Consider Modern Active MBA, a periodical dedicated to selecting an MBA program and getting the most out of
the experience. The publisher charges the Penn Bookstore $1.50 for each copy of MAMBA sold. It costs the
publisher $0.35 to print and deliver each copy of the magazine. Left over copies are discarded at a cost of $0.05 per
copy to the publisher. If it were up to the publisher, how many copies of a particular issue of MAMBA should the
publisher stock at the bookstore when the forecast of demand is normally distributed with a mean of 40 and a
standard deviation of 22?

.4) = 0.742

=> z=0.65 => Q = 40 + 0.65 x 22 = 54.3

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11. (Newsvendor)
Woot! specializes in “one day - one deal” selling. Every day they sell a product that is not available the next day. If
the item sells out, all the excess demand is lost and if items are left over, they are salvaged and not sold again on a
future day. On a particular Monday, Woot! sells Creative Labs blue-tooth adapter for only $15, buying them at $9
each. All unsold adapters are sent back to the supplier at $7 each. If Woot! estimates demand to be normally
distributed with mean 500 and standard deviation of 70 units, how many adapters should Woot! order from its
supplier to maximize its expected profit?

+ z * 𝜎 = 500 + .68*70 = 547.6

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12. (Newsvendor)

Betty Cooker runs a bakery in San Francisco that specializes in her famous Black Forest cakes. These cakes come
with four kinds of frostings—Vanilla, Chocolate, Raspberry and Devilicious. She estimates that the daily demand
for each type of cake is independent, and is Normally distributed with mean 50 and standard deviation 20. Each
customer wants to buy exactly one cake. Customers who favor a particular type of frosting will not buy any other if
their preferred frosting is out of stock. Every day in the morning, Betty Cooker and her team of bakers prepare a
fresh batch of the cakes for sale that day. Her costs to bake and top each cake are $5. Each cake sells for $15.
Betty’s Bakery prides itself on its fresh assortment, so cakes not sold by the end of that day are given away to a
soup kitchen for the homeless.
Suppose Betty wants to bake enough cakes so that she can be 97.5% sure that she can satisfy the demand for all of
her customers. How many cakes with Devilicious frosting should she prepare daily in the morning?

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13. (Newsvendor)

Goop Inc needs to order a raw material to make a special polymer. The demand for the polymer is forecasted to be
normally distributed with a mean of 250 gallons and a standard deviation of 125 gallons. Goop sells the polymer
for $25 per gallon. Goop’s purchases raw material for $10 per gallon and Goop must spend $5 per gallon to
dispose off all unused raw material due to government regulations. (One gallon of raw material yields one gallon
of polymer.) If demand is more than Goop can make, then Goop sells only what they made and the rest of demand
is lost.

a. Suppose Good purchases 150 gallons of raw material. What is the probability that they will run out of raw
material?

ds this quantity, which has a 1-21.2% = 78.8% change

b. Suppose Goop wants to ensure that there is a 92% probability that they will be able to satisfy the
customer’s entire demand. How many gallons of the raw material should they purchase?

c. How many gallons should Goop purchase to maximize its expected profit?
The underage cost is $25 - $10 = $15. The overage cost is $10 + $5 = $15. The critical ratio is 0.5, z = 0,
Q = 250

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14. (Newsvendor – Safety stock)

Consider a paint retailer who sells 100 different colors of paints. Assume that weekly demand for each color is
independent and is normally distributed with a mean of 40 and a standard deviation of 20. The replenishment lead
time from the paint factory is two weeks and the retailer aims for a customer service level (CSL)=0.95.

a. How much safety stock will the retailer have to hold if paint is mixed at the factory and held in inventory
at the retailer as individual colors?
Without postponement:

.3

b. How does the safety stock requirement change if the retailer holds base paint (supplied by the paint
factory) and mixes colors on demand?

With postponement:
20 = 465.2

The safety stock with postponement decreased, became 1/10 of the safety stock without postponement.

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15. (Newsvendor)

Montanso is a large bio firm that sells genetically modified seed to farmers. They need to decide how much seed to
put into a warehouse to serve demand for the next growing season. They will make one quantity decision. It costs
Montanso $8 to make each kilogram (kg) of seed. They sell each kg for $45. If they have more seed than
demanded by the local farmers, the remaining seed is sent overseas. Unfortunately, they only earn $3 per kg from
the overseas market (but this is better than destroying the seed because it cannot be stored until next year). If
demand exceeds their quantity, then the sales are lost – the farmers go to another supplier.

a. As a forecast for demand they will use a normal distribution with a mean of 300,000 and a standard
deviation of 106,000. How many kilograms should they place in this warehouse before the 2011 growing
season?

b. Ignoring the analysis in the previous question, how many kilograms should they place in this warehouse if
they want to minimize their inventory while ensuring that the stockout probability is no greater than 10%?

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16. The Penn Bookstore is doing an audit of the magazine procurement process. A consultant recommends an in-
stock probability of 80% for all of the magazines they stock. If they follow the consultant’s recommendation
(and achieve an 80% in-stock probability), what is the expected fraction of their magazines that will experience
a stock-out?

17. Zaza Fashions’ demand for the Polka Dot silk skirt during the Fall season is Poisson with a mean of 6.5. Zaza
calculates the order quantity that maximizes its expected profit using the newsvendor model, and determines
that the stock-out probability with that order quantity is 0.32724. What is the in-stock probability
corresponding to that order quantity?

The in-stock probability is 1-stock-out probability, so the in-stock is 1-0.32724 = 0.67276

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18. Consider two products A and B that have identical cost, retail price and demand parameters and the same short
selling season (the summer months from May through August). The newsvendor model is used to manage
inventory for both products. Product A is to be discontinued at the end of the season this year, and the
leftovers will be salvaged at 75% of the cost. Product B will be re-offered next summer, so any leftovers this
year can be carried over to the next year while incurring a holding cost on each unit left over equal to 20% of
the product's cost. How do the stocking quantities for these products compare? (Choose the right answer
below.)
a) Stocking quantity of product A is higher.
b) Stocking quantity of product B is higher.
c) Stocking quantities are equal.
d) The answer cannot be determined from the data provided.

b). The salvage value of Product A is 75% of its cost. The overage cost, Co, is the difference between Product
A’s cost and its salvage value, which is then 100% - 75% = 25% of cost. Product B’s overage cost is 20% of
its cost. Both products have the same underage cost, Cu, so Product A has the higher overage cost, which
means it has the lower critical ratio, Cu / (Co + Cu). Given they have the same demand distribution, Product
A’s optimal order quantity must be lower, or, Product B’s stocking quantity is higher.

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