Logistics Management and Planning

Practice Questions & Solutions

1. A specialty coffeehouse sells Colombian coffee at a fairly steady rate of 280 pounds annually. The
beans are purchased from a local supplier for $2.40 per pound. The coffeehouse estimates that it
costs $45 in paperwork and labor to place an order for the coffee, and holding costs are based on a
20 percent annual interest rate.
(1)
(a) Determine the optimal order quantity for Colombian coffee.
(b) What is the time between placement of orders?
(c) What is the average annual cost of holding and setup due to this item?
(d) If replenishment lead time is three weeks, determine the reorder level based on the on-hand
inventory.

(2) Consider the coffeehouse discussed in Problem 1. Suppose that its setup cost for ordering was really
only $15. Determine the error made in calculating the annual cost of holding and setup incurred as a
result of its using the wrong value of K. (Note that this implies that its current order policy is
suboptimal)
2. Next week, Super Discount Airlines has a flight from New York to Los Angeles that will be booked
to capacity. The airline knows from past history that an average of 25 customers (with a standard
deviation of 15) cancel their reservation or do not show for the flight. Revenue from a ticket on the
flight is $125. If the flight is overbooked, the airline has a policy of getting the customer on the
next available flight and giving the person a free round‐trip ticket on a future flight. The cost of this
free round‐trip ticket averages $250. Super Discount considers the cost of flying the plane from
New York to Los Angeles a sunk cost. By how many seats should Super Discount overbook the
flight?
3. A bookstore owner can purchase up to 20,000 from a publisher for $5.50 per copy. He will then sell
the books for $8.75 per copy. Leftover books can be sold at $1 per copy to other retailers. He
estimates that the demand will be 5,000 with probability 0.1, 10,000 with probability 0.5, or 20,000
with probability 0.4.

(a) Should the bookstore owner purchase any books? How many copies?
(b) What is the expected profit with perfect information?
(c) What is the maximum amount the owner should pay for perfect information?
4. You have a date at 6:00 p.m. You estimate that the average travel time from campus is 30 minutes but
there is some variation due to traffic congestion during the rush hour. When should you set off from
campus? Although it is difficult to quantify the damage of each minute you are late, you feel that it
would be 10 times more costly to be later than earlier. The travel time is normally distribution with mean
30 minutes and standard deviation 10 minutes.
5. Annual demand for a product is 13,000 units; weekly demand is 250 units with a standard deviation of
40 units. The cost of placing an order is $100, and the time from ordering to receipt is four weeks. The
annual inventory carrying cost is $0.65 per unit. To provide a 98 percent service probability, what must
be reorder point be? Suppose the production manager is told to reduce the safety stock of this item by
100 units. If this is done, what will the new service probability be?
6. Gentle Ben’s Bar and Restaurant uses 5,000 quart bottles of an imported each year. The effervescent
wine costs $3 per bottle and is served only in whole bottles because it loses its bubbles quickly. Ben
figures that is costs $10 each time an order is placed, and holding costs are 20 percent of the purchase
price. It takes three weeks for an order to arrive. Weekly demand is 100 bottles (closed two weeks
per year) with a standard deviation of 30 bottles. Ben would like to use an inventory system that
minimizes inventory cost and will provide a 95 percent service probability.

(a) What is the economic quantity for Ben to order?

(b) At what inventory level should be place an order?
7. Retailer Warehouse (RW) is an independent supplier of household items to department stores. RW
attempts to stock enough items for a 98 percent service probability. A stainless steel knife set is one
item it stocks. Demand (2,400 sets per year) is relatively stable over the entire year. Whenever new
stock is ordered, a buyer must assure that numbers are correct for stock on hand and then phone in a
new order. The total cost involved to place an order is about $5. RW figures that holding inventory
in stock and paying for interest on borrowed capital, insurance, and so on, adds up to about $4 holding
cost per unit per year. Analysis of the past data shows that the standard deviation of demand from
retailers is about four units per day for a 365-day year. Lead-time to get the order is seven days.
(a) What is the economic order quantity?
(b) What is the reorder point?
8. Sarah’s Muffler Shop has one standard muffler that fits a large variety of cars. Sarah wishes to
establish a reorder point system to manage inventory of this standard muffler. Use the following
information to determine the best order size and the reorder point:

Annual demand 3,500 Ordering $50 per order

mufflers cost
Standard 6 mufflers Service 90 %
deviation of per wording probability
daily demand day

Item cost $30 per Lead time 2 wording days

muffler
Annual holding 25% of item Wording days 300 per year
cost value
9. It is your responsibility, as the new head of the automotive section of Nichols Department Store, to
ensure that reorder quantities for the various items have been correctly established. You decide to
test one item and choose Michelin tires, XW size 185 × 14 BSW. A perpetual inventory system has
been used, so you examine this as well as other records and come up with the following data:

Cost per tire $35 each

Holding cost 20 percent of tire cost per year
Demand 1,000 per year
Ordering cost $20 per order
Standard deviation of daily demand 3 tires
Delivery lead time 4 days

Because customers generally do not wait for tires but go elsewhere, you decide on a service
probability of 98 percent. Assume the demand occurs 365 days per year.

(a) Determine the order quantity.

(b) Determine the reorder point.
10. The Kruger Power Company has determined that it costs $0.6 to read meter and prepare a bill for
each household customer. Household power usage runs at a constant rate of $40 per month, and the
opportunity cost of funds to the company is $0.0075 per month per dollar of bills outstanding.
Suppose the company decides to bill a customer every T month, when the unbilled accounts
receivable (A/R) reaches $Q.

(a) Given Q (or equivalently, T), draw a graph to show a customer's unbilled accounts receivable vs.
time.
(b) How often should the company bill its customer to minimize average costs for billing and
unbilled accounts receivable?
11. A commuter airline overbooks all its flights by one passenger (i.e., the ticket agent will take seven
reservations for an airplane that only has six seats). The no-show experience for the past 20 days is
shown below:

No-shows Frequency 0 1 2 3 4

6 5 4 3 2

Using the critical fractile, find the maximum implied overbooking opportunity loss Co (i.e., the
penalty that airline incurs if customer does not get his/her seat) if the revenue CU from a passenger
is $20.
12. HK4 is a television station that has 25 thirty-second advertising slots during each evening. It is early
January and the station is selling advertising for Sunday, March 24. They could sell all of the slots
right now for $4,000 each, but, because on this particular Sunday the station is televising the Oscar
ceremonies, there will be an opportunity to sell slots during the week right before March 24 for a
price of $10,000. For now, assume that a slot not sold in advance and not sold during the last week is
worthless to HK4. To help make this decision, the sales force has created the following probability
distribution for last-minute sales:

Number of Slots, x Probability Exactly x Slots Are

8 Sold
0.00
9 0.05
10 0.10
11 0.15
12 0.20
13 0.10
14 0.10
15 0.10
16 0.10
17 0.05
18 0.05
19 0.00

(a) How many slots should HK4 sell in advance?

(b) In practice, there are companies willing to place standby advertising messages: if there is
an empty slot available (i.e., this slot was not sold either in advance or during the last
week), the standby message is placed into this slot. Since there is no guarantee that such a
slot will be available, standby messages can be placed at a much lower cost. Now suppose
that if a slot is not sold in advance and not sold during the last week, it will be used for
a standby promotional message that costs advertisers $2,500. Now how many slots
should HK4 sell in advance?
(c) Suppose HK4 chooses a booking limit of 10 slots on advanced sales. In this case, what is
the probability there will be slots left over for stand-by messages?
(d) One problem with booking for March 24 in early January is that advertisers will withdraw their
commitment to place the ad (typically this is a result of changes in promotional strategies; for
example, a product may be found to be inferior or an ad may tum out to be ineffective). Because of
such opportunistic behavior by advertisers, media companies often overbook advertising slots. HK4
estimates that in the past the number of withdrawn ads has a Poisson distribution with mean 9.
Assume each withdrawn ad slot can still be sold at a standby price of $2,500 although the company
misses an opportunity to sell these slots at $4,000 a piece. Any ad that was accepted by HK4 but
cannot be accommodated because there isn't a free slot) costs the company $10,000 in penalties.
How many slots (at most) should be sold? You need to use the Poisson Cumulative Distribution
Function Table provided as supplement.
S Poisson Cumulative
Distribution
0 Function0.00012
with Mean = 9
1 0.00123
2 0.00623
3 0.02123
4 0.05496
5 0.11569
6 0.20678
7 0.32390
8 0.45565
9 0.58741
10 0.70599