Module 3 – Supply Chain Management

Practice Problems

1. Consider an item that is ordered on a monthly basis. The daily demand for the item is
200 and the lead-time for supply is 7 working days. A month consists of 25 working
days.
a. What is the average cyclic inventory in the system?
b. What is the pipeline inventory in the system?

2. For the above problem let the cost of ordering is USD 100 per order and the cost of
carrying inventory is USD 10 per unit per year of inventory.
a. What will be the cost of the existing plan of ordering inventory?
b. What will be the economic order quantity (EOQ)?
c. What will be the new cost of the plan if the organization chose to order as per
EOQ?

3. ABC, an electrical component manufacturer requires certain copper items in large

quantities. The annual requirements are 40,000 pieces each costing INR* 450. The
ordering cost is INR. 600 per order and the carrying cost is INR 100 per unit per year.
a. What is the optimal order quantity?
b. How frequently should XYZ place the order with the supplier?
c. Compute the total ordering cost and total carrying cost?
d. Do you notice anything by examining both the elements of the cost?

* (INR means Indian Rupee)

4. Consider the above situation. Suppose the demand has gone up by 10%. What will be
the impact (in terms of the cost of the plan) if the company decides to order with the
revised EOQ?
5. Consider an item with the following demand attributes:
Mean weekly demand = 140; Standard deviation of weekly demand = 50; Review
Period = 2 weeks.
a. Compute the safety stock required for a periodic review system when the lead
time is 1 week and the desired service level is 95%.
b. What is the order-up to-level for this policy?

6. Oriental Healthcare is a multi-specialty hospital catering to a variety of illnesses

connected to the heart and respiratory systems. The demand for a class of medical
consumable is generally random. Recently, an examination of the stores records over
a period of 10 weeks revealed the following weekly consumption pattern:

Week No. Consumption

(Units)
1 120
2 109
3 89
4 140
5 110
6 145
7 77
 8 120
9 130
10 80

The supplier of the item takes on an average 2 weeks to deliver once the order is
placed. Design an appropriate inventory control policy for a periodic review system
for a review frequency of 4 weeks for a 99% service level

Answers to the problems

1 (a) Every time the inventory ordered is 5,000. Since the inventory in the system
varies from 5,000 to 0, the average cyclic inventory is 2500; 1 (b) 1400

2 (a) USD 26,200; (b) 1095.45 (or 1096); (c) USD 10,960

3 (a) 692.8 (or 693); (b) 57.74 (or 58) orders in a year; (c) total ordering cost = total
carrying cost = 34,640 (numbers may slightly vary if we compute with rounded
values) (d) Both values are same (numbers may slightly vary if we compute with
rounded values)

4 For the increase in demand (10%). if we revise EOQ and accordingly the cost of the
plan, the new cost is total ordering cost = total carrying cost = 36,332, representing
only about 4.88% increase in cost of the plan.

5 (a) 142.46; (b) 562.46

6 Mean of weekly demand = 112; Std. Deviation of weekly Demand = 23.84

For 99% service level Z value is 2.326;
Safety stock = 135.83; Order-up to–Level = 807.83