ANSWER

For order quantity from 1 to 999 unit

• The holding cost per unit is
𝐻 = 𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑟𝑎𝑡𝑒 × 𝑃𝑟𝑖𝑐𝑒 = 20% × $5 = $1/𝑢𝑛𝑖𝑡
• The economic order quantity is

2×𝐷×𝑆 2 × 5000 × 49
𝐸𝑂𝑄 = √ =√ = 700 𝑢𝑛𝑖𝑡𝑠
𝐻 1

• Since 1 unit < EOQ = 700 units < 999 units, then Qi = 700 units
• The total cost is
 𝑄 𝐷 700 5000
𝑇𝐶 = ×𝐻+ ×𝑆+𝑃×𝐷 = ×1+ × 49 + 5 × 5000 = $25,700
2 𝑄 2 700
Similarly we get the above table
Since $24,980 is the minimum total annual cost, the optimum ordering quantity is 1000 units
Note:
• If Q* < qi, then Qi* = qi.
• If qi  Q* < qi+1, then Qi* = Q*
• If qi+1  Q*, eliminate this level from further consideration.

ANSWER

For order quantity from 1 to 299 unit

• The holding cost per unit is
𝐻 = 𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑟𝑎𝑡𝑒 × 𝑃𝑟𝑖𝑐𝑒 = 25% × $60 = $15/𝑢𝑛𝑖𝑡
• The economic order quantity is

2×𝐷×𝑆 2 × 936 × 45
𝐸𝑂𝑄 = √ =√ = 74.94 𝑢𝑛𝑖𝑡𝑠
𝐻 15
 • Since 1 unit < EOQ = 74.94 units < 299 units, then Qi = 74.94 ≈ 75 units
• The total cost is
𝑄 𝐷 75 936
𝑇𝐶 = ×𝐻+ ×𝑆+𝑃×𝐷 = ×1+ × 45 + 60 × 75 = $57.284
2 𝑄 2 75
Similarly we get the above table
Since $56,998.7 is the minimum total annual cost, the optimum ordering quantity is 500 units
ANSWER

• Gross Requirement of Side boards and Shelves in Level 1 are based on BOM and Planned
order releases of Cabinet in Level 0. For example: On BOM, 1 Cabinat needs 2 Side boards,
and we need 80 cabinets in month 1. Hence the gross requirements of Side boards should
be 80x2 = 160 side boards in month 1. If they have backlog, we use formula: Gross
requirement (period 𝒕) = Customer demand (period 𝒕) + Backlog (period 𝒕 − 𝟏)
 • Projected on hand (period t) (the first line) = Projected on hand (period 𝒕 − 𝟏) +
Scheduled receipts (period 𝒕) – Gross requirement (period 𝒕)
• Projected on hand (period t) (the second line) = Projected on hand (period 𝒕) (the first
line) < Safety stock, then they equals to safety stock. Otherwise, we pass thhis line.
• Net requirements (period 𝒕) = MAX{0, Gross requirements (period 𝒕) + Projected on
hand (period t) (the second line) – On-hand invnetory (period 𝒕 − 𝟏) – Scheduled/Planned
receipts (periods t)}
• Planned order receipts for LFL is equal to Net requirement, but for Q = 80, if 0< net
requirement < 80, then order 80. If 80 < net requirement < 160, we order 160.
• Finally, Planned order releases is offset with lead time.
Note:
• The above formulas are quite different from those in slide because we need to consider
safety stock for each item, thus we use Projected on hand (period t) (the second line)
• Common lot sizing rules
➔ Multiple quantities: Order at least nX items
Ex: multi 50 → order 50, 100, 150, 200, ...
➔ L4L: Order the exact quantities needed
 ANSWER FOR EXERCISES IN LECTURE NOTES
Chapter 5: PROCUREMENT
2. Sourcing decisions
Example: Consider a situation in which a firm has the option to make or buy a part. Its annual
requirement is 15,000 units. A supplier is able to supply the part at $7 per unit. The firm estimates
that it costs $500 to prepare the contract with the supplier. To make the part, the firm must invest
$25,000 in equipment, and the firm estimates that it costs $5 per unit to make the part.
Chapter 6: INVENTORY MANAGEMENT
1. Inventory System
Inventory Classification
 2. Inventory Models
Example 1: The store S has observed a stable monthly demand for its line of mobile phone
iPhone of 100 pcs per month. The store incurs a setup cost of $2,000 every time it places an
order for additional iPhones. The store pays $200 per iPhone. The store’s out-ofpocket costs
of storing an iPhone for a year are about 10% and the opportunity cost of capital is 15%.
Question: What order size do you recommend for the S store?
D = 1200 pcs/ year, S = $2,000 / order
H = (0.15 + 0.10) 200 = $50 /pcs/ year
→Q* = SQRT(2*1200*2000/50) = 309.8
→round to Q* = 310
N = 1200/310 = 3.9 orders/year
Order every 365/3.9 = 94 days
Total inventory cost:
TIC(Q*) = S ́ (D/Q*) + H ́ (Q*/2)
= 2000 ́ (1200/310) + 50 ́ (310/2)
= $7,745 + $7,745 = $15,492 / year
Example 2:
The retailer of Heat International is negotiating the air-conditioning units’ respective
purchase cost along with the quantity ordered. Heat International offers the discounts
summarized:

The total demand for air-conditioning units is 6,500 units/year. Ordering cost is €50 and the
annual inventory holding cost is estimated 25% of the unit’s price.
Question: How many air-conditioning units should the retailer order to minimize its total
annual cost?
For the lowest price:
 2𝐷𝑆 2 × 6500 × 50
𝐸𝑂𝑄 = √ =√ = 213.57 𝑢𝑛𝑖𝑡𝑠 < 500
𝐻 0.25 × 57

➔ Invalid → Buy 500

For the next price:

2𝐷𝑆 2 × 6500 × 50
𝐸𝑂𝑄 = √ =√ = 210.28 𝑢𝑛𝑖𝑡𝑠 < 300
𝐻 0.25 × 58.8

➔ Invalid → Buy 300

For the last price:

2𝐷𝑆 2 × 6500 × 50
𝐸𝑂𝑄 = √ =√ = 208.16 𝑢𝑛𝑖𝑡𝑠
𝐻 0.25 × 60

➔ Valid → Buy 208

The total cost for EOQ is
𝑄 𝐷 208 6500
𝐶208 = 𝐻 + 𝑆 + 𝑃𝐷 = × 0.25 × 60 + × 50 + 60 × 6500 = $393,122.5
2 𝑄 2 208
The total cost when ordering 300 units is
𝑄 𝐷 300 6500
𝐶300 = 𝐻 + 𝑆 + 𝑃𝐷 = × 0.25 × 58.8 + × 50 + 58.8 × 6500 = $385,488.3
2 𝑄 2 300
The total cost when ordering 500 units is
𝑄 𝐷 500 6500
𝐶208 = 𝐻 + 𝑆 + 𝑃𝐷 = × 0.25 × 57 + × 50 + 57 × 6500 = $374,712.5
2 𝑄 2 500
Since $374,712.5 is the minimum total annual cost, the optimum ordering quantity is 500 units