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REMINDER
• In order to having high efficiency and effective of the tutorial, everyone
should involve and take part.

ENT 457 – Management, • Extra reading and effort is needed in order for having better
understanding.

production and operation

Sem 2 2020/2021
Tutorial 2

1 2

Chapter 5
1. How does factor weighting incorporate personal preference in
location choices?
Different weights can be given to different factors. Personal
preferences are included. For example, if management wants to
locate where cultural attractions abound, it can load that factor,
which will bias against most small towns.
Chapter 5
2. Although most organizations may take the location decision
infrequently, there are some organizations that make the decision
quite regularly and often. Provide one or two examples. How might
their approach to the location decision differ from the norm?
Franchise operations may add new units per year; Exxon,
McDonald’s, and Walmart add hundreds of units per year, meaning
almost daily location decisions. For such organizations, the location
decision becomes more structured, more routine. Perhaps by
repeating this process they discover what makes their strategic
locations decisions successful.

3 4
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Chapter 5
3. How can the center-of-gravity method be used to find the best
locations for local services such as public libraries, medical centers,
or post offices? What constraints should be considered when the
method is used in large, congested cities?
The center-of-gravity method assumes that cost is directly
proportional to both distance and volume shipped. For service
facilities, revenue is assumed to be directly proportional to
proximity to markets.
Chapter 5
4. Why shouldn’t low wage rates alone be sufficient to select a
location?
Besides low wage rates, productivity should be considered also.
Employees with poor training, poor education, or poor work habits
are not a good buy. Moreover, employees who cannot or will not
reach their place of work are not much good to the organization.

5 6

Chapter 5 Chapter 5
a) At which site should Subway open the new restaurant?
5. Subway, with more than 27,000 outlets in the U.S., is planning for a
new restaurant in Buffalo, New York. Three locations are being
considered. The following table gives the factors for each site. Factor Weight Maitland Baptist Church Northside Mall

Space 0.30 60 18 70 21 80 24
Factor Weight Maitland Baptist Church Northside Mall
Costs 0.25 40 10 80 20 30 7.5
Space 0.30 60 70 80
Traffic density 0.20 50 10 80 16 60 12
Costs 0.25 40 80 30
Neighbourhood
0.15 50 7.5 70 10.5 40 6
Traffic density 0.20 50 80 60 income

Neighbourhood income 0.15 50 70 40 Zoning laws 0.10 80 8 20 2 90 9

Zoning laws 0.10 80 20 90 7 53.5 69.5 58.5

8
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Chapter 5 Chapter 5
b) If the weights for Space and Traffic density are reserved, how
would this affect the decision? 6. The fixed and variable costs for three potential manufacturing plant
sites for a rattan chair weaver are shown:
Factor Weight Maitland Baptist Church Northside Mall
Site Fixed cost per year ($) Variable cost per unit ($)
12 14 16 1 500 11
Space 0.20 60 70 80
2 1000 7
Costs 0.25 40 10 80 10 30 7.5 3 1700 4

Traffic density 0.30 50 15 80 24 60 18

a) Over what range of production is each location optimal?
Neighbourhood Site 1 ∶ 500 + 11𝑥
0.15 50 7.5 70 10.5 40 6
income
Site 2 ∶ 1000 + 7𝑥
Zoning laws 0.10 80 8 20 2 90 9
Site 3 ∶ 1700 + 4𝑥
52.5 70.5 56.5
9 10

Chapter 5 Chapter 5
b) For a production of 200 units, which site is best?
• Site 1 is optimal for production less
than or equal to 125 units. • For 200 units, site 2 is optimal.
• Site 2 is optimal for production
between 125 and 233 units.
• Site 3 is optimal for production
above 233 units.

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Chapter 5 Chapter 5
Map coordinates
City
7. A chain of home health care firms in Louisiana needs to locate a X Y
central office from which to conduct internal audits and other Covington 9.2 3.5
periodic reviews of its facilities. These facilities are scattered Donaldsonville 7.3 2.5
throughout the state, as detailed in the following table. Each site, Houma 7.8 1.4
except for Houma, will be visited three times each year by a team of Monroe 5.0 8.4
workers, who will drive from the central office to the site. Houma Natchitoches 2.8 6.5
will be visited five times a year. Which coordinates represent a good New Iberia 5.5 2.4
central location for this office? What other factors might influence Opelousas 5.0 3.6
the office location decision? Where would you place this office? Ruston 3.8 8.5
Explain.

13 14

Chapter 5 Chapter 5
Map coordinates
City Weight
X Y • The distance-minimizing location is at (5.95, 4.35). This minimizes
Covington 3 9.2 27.6 3.5 10.5 distance traveled, but is “straight line”, which does not reflect realities
Donaldsonville 3 7.3 21.9 2.5 7.5 of highway routes. It does not consider rivers, bridges, and other
Houma 5 7.8 39 1.4 7 geographical impediments. Consider placing the office as near the
Monroe 3 5.0 15 8.4 25.2 center of gravity as possible and still be on or near a major highway.
Natchitoches 3 2.8 8.4 6.5 19.5 Students who overlay this onto a map of Louisiana should recognize
New Iberia 3 5.5 16.5 2.4 7.2 that Baton Rouge would be an ideal location.
Opelousas 3 5.0 15 3.6 10.8
Ruston 3 3.8 11.4 8.5 25.5
26 154.8 113.2
154.8 113.2
coordinate − x = = 5.95 coordinate − y = = 4.35
26 26 15 16
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Chapter 5
8. What are the alternative forms of work cells discussed in this
chapter?
Three types of work cells are the small work cell within a plant,
focused work center, and focused factory.
Chapter 5
9. What are the variables that a manager can manipulate in a retail
layout?
Retail store layout variables that a manager can manipulate are:
o Overall arrangement or pattern through the store
o The allocation of space to individual products

17 18

Chapter 5 Chapter 5
10. Gordon Miller’s job shop has four work areas, A, B, C, and D. It cost Gordon $1 to move 1 work piece 1 foot. What is the weekly
Distances in feet between centers of the work areas are: total material handling cost of the layout?
A B C D A B C D A B C D
A - 4 9 7 A - 4 9 7 A - 8 7 4
B - - 6 8 B - - 6 8 B - - 3 2
C - - - 10 C - - - 10 C - - - 6
D - - - - D - - - - D - - - -
Workpieces moved, in hundreds of workpieces per week, between • movements = 4 × 8 + 9 × 7 + 7 × 4 + 6 × 3 + 8 × 2 + 10 × 6
pairs of work areas, are: • movements = 21700
A B C D • cost = 21700 × $1 = $21700
A - 8 7 4
B - - 3 2
C - - - 6
D - - - -
19 20
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Chapter 5
11. You have just been hired as the director of operations of Reid
Chocolates, a purveyor of exceptionally fine candies. Reid To

Refrigerator (1)
Chocolates has two kitchen layouts under consideration for its

Counter (2)

Storage (4)

Stove (5)
Sink (3)
recipe making and testing department. The strategy is to provide
the best kitchen layout possible so that food scientists can devote
their time and energy to product improvement, not wasted effort in From
the kitchen. You have been asked to evaluate these two kitchen Refrigerator (1) 0 8 13 0 0
layouts and to prepare a recommendation for your boss, Mr Reid, Counter (2) 5 0 3 3 8
Sink (3) 3 12 0 4 0
so that he can proceed to place the contract for building the Storage (4) 3 0 0 0 5
kitchens. Stove (5) 0 8 4 10 0

21 22

𝑇 𝐷 𝑇 𝐷

To 𝑇 ×𝐷 = 600 To 𝑇 ×𝐷 = 602
Refrigerator (1)

Refrigerator (1)
Counter (2)

Counter (2)
Storage (4)

Storage (4)
Stove (5)

Stove (5)
Sink (3)

Sink (3)
Layout 1 : 600
Layout 2 : 602
From From
Refrigerator (1) 0 8 13 0 0 Refrigerator (1) 0 8 13 0 0
Counter (2) 5 0 3 3 8 Counter (2) 5 0 3 3 8
Sink (3) 3 12 0 4 0 Sink (3) 3 12 0 4 0
Storage (4) 3 0 0 0 5 Storage (4) 3 0 0 0 5
Stove (5) 0 8 4 10 0 23
Stove (5) 0 8 4 10 0 24
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Immediate
Task Time (sec)
predecessors
Chapter 5 Chapter 5 A
B
12
15
-
A
12. Standford Rosenberg Computing wants to establish an assembly a) What is the cycle time?
C 8 A
D 5 B, C
line for producing a new product, the Personal Digital Assistant E 20 D
(PDA). The tasks, task time, and immediate predecessors for the 60
tasks are as follows: Production time available per day
Immediate cycle time =
Task Time (sec) units required per day
predecessors
A 12 - 60 × 60
B 15 A cycle time = = 20 seconds per PDA
180
C 8 A
D 5 B, C
E 20 D

Rosenberg’s goal is to produce 180 PDAs per hour.

25 26

Immediate Immediate
Task Time (sec) Task Time (sec)
predecessors predecessors
Chapter 5 A
B
12
15
-
A
Chapter 5 A
B
12
15
-
A
C 8 A C 8 A
b) What is the theoretical D 5 B, C c) Can the theoretical minimum D 5 B, C
minimum for the number of E 20 D actually be reached when E 20 D
workstations that Rosenberg 60 workstations are assigned? 60
can achieve in this assembly cycle time = 20 seconds per PDA cycle time = 20 seconds per PDA
line? minimum workstation = 3
15
∑ Time for task 𝑖
minimum workstation = B
cycle time 12 5 20
60 A D E
minimum workstation = =3 8
20
C
Yes, it is feasible
27 28

Chapter 6
1. Define sales and operation planning.
Sales and Operations Planning (S&OP) balances resources and
forecast demand and aligns the organization’s competing demand
(from supply chain to final customer) while linking strategic planning
with operations overall planning horizons.
29
Chapter 6
3. List the strategic objectives of aggregate planning. Which one of
these is most often addressed by the quantitative techniques of
aggregate planning? Which one of these is generally the most
important?
• Strategic objectives: minimize cost over the planning period,
smooth fluctuations in workforce, drive down inventory levels
for time-sensitive stock, and meet a high level of service
regardless of cost.
• Cost minimization is the most often treated quantitatively and is
generally the most important.
31
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Chapter 6
2. Define aggregate planning.
Aggregate planning is concerned with the quantity and timing of
production for the intermediate future; typically encompasses a
time horizon of 3 to 18 months.
30
Chapter 6
4. What are the advantages and disadvantages of varying the size of
the workforce to meet demand requirements each period?
• The advantage of varying the size of the workforce as required
to adjust production capacity is that one has a fundamental
ability to change production capacity in relatively small and
precise increments.
• The disadvantages are that a ready supply of skilled labor is not
always available, newly hired personnel must be trained, and
layoffs undermine the morale of all employees and can lead to a
wide-spread decrease in overall productivity.
32
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Chapter 6 Chapter 6 Month Production Forecast

days demand (units)
Jan 22 1000
5. What is the relationship between the aggregate plan and the 6. The table below provides Feb 19 1200
Mar 21 1100
master production schedule? information about the demand Apr 20 1200
The master production schedule (MPS) is produced by forecast and the number of May 22 1300
disaggregating the aggregate plan. working days for a tools Jun 21 1200
manufacturing factory. Construct Jul 20 1250
a graph for the daily demand and Aug 22 1300
Sep 21 1300
the average daily demand Oct 22 1400
forecast. Nov 22 1200
Dec 20 1000

33 34

Month Production Forecast Needed

days demand production
(units) each day Chapter 6
Jan 22 1000 45.5
Feb 19 1200 61.1 7. Consuelo Chua, Inc., is a disk drive manufacturer in need of an
Mar 21 1100 54.5 aggregate plan for July through December. The company has
Apr 20 1200 61.9 gathered the following data:
May 22 1300 61.4 Costs
Jun 21 1200 64.3 Holding cost $ 8 /disk /month
Jul 20 1250 61.9 Subcontracting $80 disk
Aug 22 1300 54.5 Regular-time labor $12 /hour
Sep 21 1300 52.4 Overtime labor $ 18 / hour for hours above 8 hours/worker /day
Hiring cost $ 40/worker
Oct 22 1400 50.0
Layoff cost $ 80/worker
Nov 22 1200 52.5
45.0 Demand
Dec 20 1000
Jul Aug Sep Oct Nov Dec
252 13950 55.4 400 500 550 700 800 700
35 36
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Chapter 6 Chapter 6
*No cost is incurred for unmet demand, but unmet demand a) Vary the workforce so that production meets demand. Chua had
(backorders) must be handled in the following period. If half or more eight workers on board in June.
of a worker is needed, round up) • Production per person per day: 8 hr/person ÷ 4 hrs/disk
8 hr/person
Other data • Therefore, each person
for 20can produce
working 2 disks
40 disks per per day, or 40
Current workforce (June) 8 people 4 hrs/disk
Labor-hours/disk 4 hours disks per month. days month
Workdays/month 20 days
Beginning inventory 150 disks
No requirement for ending inventory 0 disk

*Note that there is no holding cost for June

What will each of the two following strategies cost?

37 38

Chapter 6
b) Vary overtime only and use a constant workforce of eight.
• Production per person per day: 8 hr/person ÷ 4 hrs/disk
• Therefore, each person can produce 2 disks per day, or 40
disks per month.
• Inventory cost = (10+20+20) × $8 = $400
• Hiring cost = (7+1+3+3) × $40 = $560
• Layoff cost = (2+2) × $80 = $320
• Total cost = $400 + $560 + $320 = $1280

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Chapter 6
8. What are the three information needs of the transportation model?
Three information needs of the model: the origin points and the
• Extra total (OT) cost = 1580 × (4 hrs/disk × $18/hr – 4 hrs/disk × $12/hr) capacity or supply per period at each; the destination points and the
demand per period at each; and the cost of shipping one unit from
= 1580 × ($72 - $48) = $37920
each origin to each destination.
• Holding cost = 70 × $8 = $560
• Total cost = $37920 + $560 = $38480

41 42

Chapter 6 Chapter 6
9. How do you know when an optimal solution has been reached? 10. What is meant by an unbalanced transportation problem, and how
An optimal solution has been reached when all improvement would you balance it?
indices (profits) are non-negative (non-positive). • Total supply is not equal to total demand in an unbalanced
transportation problem.
• Such a problem can be balanced by adding a dummy row (supply <
demand) or column (demand < supply).

43 44
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From To Demand period 1 Demand period 2 Demand period 3 Supply

Initial inventory 20 Total = 130

Chapter 6 Regular time period 1 30
11. Ram Roy’s firm has developed the following supply, demand, cost,
Overtime period 1 10
and inventory data. Allocate production capacity to meet demand
at a minimum cost using the transportation method. What is the Subcontract period 1 5
cost? Assume that the initial inventory has no holding cos in the
first period and backorders are not permitted. Supply available: Regular time period 2 35 Supply > Demand
Period Regular time Overtime Subcontract Demand forecast Unbalance
Overtime period 2 12
1 30 10 5 40
2 35 12 5 50
Subcontract period 2 5
3 30 10 5 40
Initial inventory 20 units Regular time period 3 30
Regular-time cost per unit $ 100
Overtime cost per unit $ 150 Overtime period 3 10
Subcontract cost per unit $ 200
Carrying cost per unit per month $ 4 Subcontract period 3 5
Total = 172
45 46
Demand 40 50 40

From To Demand period 1 Demand period 2 Demand period 3 Excess Supply From To Demand period 1 Demand period 2 Demand period 3 Excess Supply
0 4 8 0 0 4 8 0
Initial inventory 20 Initial inventory 20
20
100 104 108 0 100 104 108 0
Regular time period 1 30 Regular time period 1 30
20 10
150 154 158 0 150 154 158 0
Overtime period 1 10 Overtime period 1 10
10
200 204 208 0 200 204 208 0
Subcontract period 1 5 Subcontract period 1 5
5
100 104 0 100 104 0
Regular time period 2 35 Regular time period 2 35
35
150 154 0 150 154 0
Overtime period 2 12 Overtime period 2 12
5 7
200 204 0 200 204 0
Subcontract period 2 5 Subcontract period 2 5
5
100 0 100 0
Regular time period 3 30 Regular time period 3 30
30
150 0 150 0
Overtime period 3 10 Overtime period 3 10
10
200 0 200 0
Subcontract period 3 5 Subcontract period 3 5
5
47 48
Demand 40 50 40 32 172 Demand 40 50 40 32 172
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From To Demand period 1 Demand period 2 Demand period 3 Excess Supply From To Demand period 1 Demand period 2 Demand period 3 Excess Supply
0 4 8 0 0 4 8 0
Initial inventory 20 Initial inventory 20
20 20
100 104 108 0 100 104 108 0
Regular time period 1 30 Regular time period 1 30
20 10 20 10
150 154 158 0 150 154 158 0
Overtime period 1 10 Overtime period 1 10
0 10 0 10
No. of cell = 12 200 204 208 0 200 204 208 0
Subcontract period 1 5 Subcontract period 1 5
5 5
No. of row (m) = 10 100 104 0 100 104 0
Regular time period 2 35 Regular time period 2 35
35 35

No. of column (n) = 4

Overtime period 2
150 154 0
12 Overtime period 2
150 154 0
12
5 7 5 7

m + n – 1 = 13 ≠ 12
Subcontract period 2
200 204
5
0
5 Subcontract period 2
200 204
5
0
5

100 0 100 0
Initial solution is
Regular time period 3
30
30 Regular time period 3
30
30

degenerate
Overtime period 3
150 0
10 Overtime period 3
150 0
10
10 Cost = $ 11790 10
200 0 200 0
Subcontract period 3 5 Subcontract period 3 5
5 5
49 50
Demand 40 50 40 32 172 Demand 40 50 40 32 172

Cost = $ 340800
Chapter 6 Regular-time cost per knob $ 50
Overtime cost per knob $ 60 No. of cell = 14
12. The production planning Subcontracting cost per knob $ 70
period for knobs at Al-Arabi Carrying cost per knob per month $ 2 No. of row (m) = 14
Factory, Egypt, is 6 months.
Cost data is as follows: Month Jab Feb Mar Apr May Jun No. of column (n) = 6
Demand 800 1000 1200 1400 1200 1000
For each of the next 6 Capacity
m + n – 1 = 19 ≠ 14
months, capacity and Regular time 800 800 800 800 800 800
demand data for knobs are Initial solution is
Overtime 200 200 200 200 200 200
as follows: degenerate
Subcontracting 400

Develop a production plan that minimizes costs using the

transportation method. Subcontracting is allowed in April only and no
backorders are allowed.
51 52
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Chapter 7 Chapter 7
1. Describe the four types of inventory. 2. What is the implication of the Pareto principle?
The four types of inventory are: The purpose of the ABC system is to identify those items that
• Raw material—items that are to be converted into product require more attention due to cost or volume.
• Work-in-process (WIP)—items that are in the process of being converted
• Finished goods—completed items for which title has not been transferred
• Maintenance, repair, and operating supplies (MRO)—items that are
necessary to keep the transformation process going

53 54

Chapter 7 Chapter 7
3. Identify and explain the types of costs that are involved in an 4. Explain the major assumptions of the basic EOQ model.
inventory system. Assumptions of EOQ model
Types of costs:- • demand is known and constant over time; lead time is known
• holding cost: the cost of capital invested and space required and constant
• shortage cost: the cost of lost sales or customers who never return; the • receipt of inventory is instantaneous
cost of lost goodwill
• ordering cost: the costs associated with ordering, transporting, and
• quantity discounts are not possible
receiving the items • the only variable costs are the costs of placing an order or
• unit cost: the actual cost of the item setting up production and the cost of holding or storing
inventory over time
• if orders are placed at the right time, stockouts or shortages can
be completely avoided.
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Chapter 7 Chapter 7
5. What is meant by “service level”? 6. What is “safety stock”? What does safety stock provide safety
Service level refers to the probability that demand will not be against?
greater than supply during lead time. It is the complement of the Safety stock is inventory beyond average demand during lead time,
probability of a stockout. held to control the level of shortages when demand and/or lead
time are not constant.
Inventory carried to ensure that the desired service level is reached.

57 58

Chapter 7 Chapter 7 Item code Price/unit Annual demand (units)

A2 50 3000
7. When demand is not constant, the reorder point is a function of 8. The manager of a traffic and safety B8 12 4000
what four parameters? company wants to use the ABC C7 45 1500
classification system to classify its D1 10 6000
The reorder point is a function of: demand per unit of time, lead inventory items. The annual demand
E9 20 1000
F3 500 500
time, customer service level, and standard deviation of demand. and the selling price of each item are G2 1500 300
listed in the table below. H2 20 600
I5 10 1750
J8 5 2500

59 60
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Chapter 7 Chapter 7
a) Develop an ABC classification for these 10 items. Takes the top
20% of the 10 items, based on a criterion of demand times cost Item code Price/unit Annual demand (units) Demand  Cost Classification
A2 50 3000 150,000 B
per unit, should be A items. The next 30% of the items are B8 12 4000 48,000 C
categorized as B items. The remaining 50% of the items become C7 45 1500 67,500 B 30%
C items. D1 10 6000 60,000 B of B
Item code Price/unit Annual demand (units) Demand  Cost Classification E9 20 1000 20,000 C
A2 50 3000 150,000 F3 500 500 250,000 A 20%
B8 12 4000 48,000 G2 1500 300 450,000 A of A
C7 45 1500 67,500 H2 20 600 12,000 C
I5 10 1750 17,500 C 50%
D1 10 6000 60,000
J8 5 2500 12,500 C of C
E9 20 1000 20,000
F3 500 500 250,000
G2 1500 300 450,000
H2 20 600 12,000
I5 10 1750 17,500
J8 5 2500 12,500 61 62

Chapter 7 Chapter 7
b) How can the company use this information? c) The company review the classification and then places item A2
The company can use this information to manage A and B items into the A category. Why might he do so?
more closely and to save ordering costs on less important C
A2 could easily move to the A Item code Demand  Cost Classification
items by ordering only when A or B items are being ordered A2 150,000 A
category based on annual dollar
from the same supplier. B8 48,000 C
volume. In a small sample, 30% of the C7 67,500 B
items can be placed in the A category D1 60,000 B
if deemed appropriate. E9 20,000 C
F3 250,000 A
G2 450,000 A
H2 12,000 C
I5 17,500 C
J8 12,500 C

63 64
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Chapter 7 Chapter 7
9. William Beville’s computer training school, in Richmond, stocks 9. William Beville’s computer training school, in Richmond, stocks
workbooks with the following characteristics: workbooks with the following characteristics:
Demand = 19500 units/year, Order cost = $25/order, Holding cost = Demand = 19500 units/year, Order cost = $25/order, Holding cost =
$4/unit/year $4/unit/year
a) Calculate the EOQ for the workbooks. b) What are the annual holding costs for the workbook?
ℎ ∗ 4
2𝐴𝐷 2 25 19500 𝑄 = 494 = $988
𝑄∗ = = = 493.71 ≈ 494 units 2 2
ℎ 4

65 66

Chapter 7 Chapter 7
10. ABC Company produces polymer injection components. Currently it
plans to expand its production by introducing new product. Accordingly
9. William Beville’s computer training school, in Richmond, stocks to the analysis, the demand for the injected component is forecast about
workbooks with the following characteristics: 100 kg per month, and it can manufacture at the rate of 5000 kg per
Demand = 19500 units/year, Order cost = $25/order, Holding cost = month. To initiate production, the machines have to be thoroughly
$4/unit/year checked and cleaned, and it costs the company RM100 per set-up. The
cost to produce this injected component is RM50 a kg, and the inventory
c) What are the annual ordering costs? holding cost is estimated as 20 percent annually. Backorder is allowed
𝐴𝐷 25 19500 and it is found that it will cost RM1 per kg short for loss of good will and
= = $987 the shortage penalty is estimated to be RM2 per kg short per month.
𝑄∗ 494 Supplier A proposed to deliver the injected components at the flat rate
of RM50 per kg. After estimation, it will costs RM60 in paperwork and
labour to place an order. If due to some reasons, it is confirm that
backorder will be occur, should ABC company order from supplier A or
67 produce internally? 68
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Step 1 : Extract the information and prepare it in table form Step 2 : Identify the model needed for the problem
π RM 1 RM 2 × 12 = RM 24 π RM 1 RM 2 × 12 = RM 24
D 100 kg × 12 = 1,200 kg i 0.20 D 100 kg × 12 = 1,200 kg i 0.20
5,000 kg × 12 = 60,000 kg 5,000 kg × 12 = 60,000 kg
cinternal RM 50 csupplier A RM 50 cinternal RM 50 csupplier A RM 50
Ainternal RM 100 Asupplier A RM 60 Ainternal RM 100 Asupplier A RM 60
hinternal RM 50 × 0.20 = RM 10 hsupplier A RM 50 × 0.20 = RM 10 hinternal RM 50 × 0.20 = RM 10 hsupplier A RM 50 × 0.20 = RM 10

EPQ with backlog EOQ with backlog

69 70

Step 3 : Derive the proper equation of Q, b and K(Q,b) for the identified EPQ with backlog
model in step 2.
Remember that
EOQ >>

Without backlog >>

71 72
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EOQ with backlog Step 4 : Calculate the corresponding Q

Suggestion convert parameters in table to symbols in calculator
(A, B, C, D, E, F, M, X, Y)
E = π RM 1
D = D 100 kg × 12 = 1,200 kg
= 5,000 kg × 12 = 60,000 kg
F = RM 2 × 12 = RM 24
= i 0.20
X = 0.98
C1 = cinternal RM 50
A1 = Ainternal RM 100
M1 = hinternal RM 50 × 0.20 = RM 10
C2 = csupplier A RM 50
A2 = Asupplier A RM 60
M2 = hsupplier A RM 50 × 0.20 = RM 10
Y = Q*
73 74
B = b

EPQ with backlog EOQ with backlog

75 76
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Step 5 : Calculate the corresponding b EPQ with backlog

Suggestion convert parameters in table to symbols in calculator
(A, B, C, D, E, F, M, X, Y)
E = π RM 1
D = D 100 kg × 12 = 1,200 kg
= 5,000 kg × 12 = 60,000 kg
F = RM 2 × 12 = RM 24
= i 0.20
X = 0.98
C1 = cinternal RM 50
A1 = Ainternal RM 100
M1 = hinternal RM 50 × 0.20 = RM 10
C2 = csupplier A RM 50
A2 = Asupplier A RM 60
M2 = hsupplier A RM 50 × 0.20 = RM 10
Y = Q*
77 78
B = b

EOQ with backlog Step 6 : Calculate the corresponding K(Q, b)

Suggestion convert parameters in table to symbols in calculator
(A, B, C, D, E, F, M, X, Y)
E = π RM 1
D = D 100 kg × 12 = 1,200 kg
= 5,000 kg × 12 = 60,000 kg
F = RM 2 × 12 = RM 24
= i 0.20
X = 0.98
C1 = cinternal RM 50
A1 = Ainternal RM 100
M1 = hinternal RM 50 × 0.20 = RM 10
C2 = csupplier A RM 50
A2 = Asupplier A RM 60
M2 = hsupplier A RM 50 × 0.20 = RM 10
Y = Q*
79 80
B = b
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Step 6 : Answer the question

Chapter 7
11. A local seafood supplier provides several high grade salmon fish
from Japan in order to satisfy a growing demand for salmon in Kuala
Lumpur. The owner, John, estimates that the demand for the
salmon fish is pretty steady at 175 kg per month. The salmon fish
cost RM 185 per kg. The order is made through the international
call to his brother in Tsukiji, Japan. John estimates the fixed cost
around RM 200. It takes about 3 weeks to receive an order from
Tsukiji. The accountant expertise recommends an annual cost of
capital of 22 percent, a cost of shelf space of 3 percent of the value
of the item, and a cost of 2 percent of the value for taxes and
insurance. Assume that backorder is not allowed and the shop open
daily including public holidays.

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Chapter 7 Chapter 7
a) Determine the weight of salmon fish that John should order. b) Refer to the weight in (a), evaluate the optimum duration in
term of days in order to place next order and how will John alert
D = 175 kg x 12 = 2100 kg/year he should place a new order. Illustrate this inventory profile.
c = RM 185 / kg
𝑇 = 𝑄 ⁄𝐷 = 130 ⁄ 2100 = 0.0619 year = 22.6 days
A = RM 200
L = 3 weeks 2100
ROP = 𝑑 × 𝐿 = 3 × 7 = 120.82 kg = 120 kg
i = 0.22 + 0.03 + 0.02 = 0.27 365
h = ic = 0.27 × 185 = RM 49.95 / kg

2𝐴𝐷 2 200 2100

𝑄∗ = = = 129.68 ≈ 130 kg
ℎ 49.95
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Chapter 7 Chapter 7
c) Suppose that the salmon fish sell for RM 400 per kg. Evaluate d) If the salmon fish have a shelf life of only 16 days, predict the
either these salmon fish a profitable item for John and thus trouble with the policy that derived in answer (a). Suggest a
estimate the annual profit or annual loss can John expect to policy to help John and determine either salmon fish still
realize from this item? Assume that he operates the system profitable.
optimally. Order size of 16 days = × 16 = 92.05 ≈ 92 kg
𝐴𝐷 200 2100
Total cost 𝐾 𝑄∗ , 𝑏 = 𝑐𝐷 + = 185 2100 + = RM391730.77 𝐴𝐷 200 2100
𝑄 130 Total cost 𝐾 𝑄∗ , 𝑏 = 𝑐𝐷 + = 185 2100 + = RM393065.22
𝑄 92
Total sell = 400 − 185 × 2100 = RM451500.00
Annual profit = RM451500.00 − RM393065.22 = RM58434.78
Annual profit = RM451500.00 − RM391730.77 = RM59769.23
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