13 Inventory Management

Answers to Questions

13-1. In general, independent demand items are final or finished products that are not dependent
upon internal production activity; that is, the demand is usually external and beyond the
direct control of the organization. Alternatively, dependent demand is usually a component
part or material used to produce a final product. An example of independent demand for a
pizza restaurant would be a final product such as a pizza, whereas dependent demand
would be any of the ingredients (cheese, tomato sauce, dough, etc.) and perhaps
complementary items such as drinks.
13-2. In a fixed-order-quantity system, an order is placed for the same constant amount
whenever the inventory on hand decreases to a certain level, whereas in a fixed-time-
period system, an order is placed for a variable amount after an established passage of
time.
13-3. The customer service level is the ability to meet internal or external demand at a specified
level of efficiency. High quality service is often perceived as always being able to meet
demand, which normally requires high inventory levels and can be costly, or efficient
management of the inventory system such that demand is met most of the time.
13-4. An ABC system is a method for classifying inventory according to its dollar value. In
general, about 5 to 15 percent of all inventory items will account for 70 to 80 percent of
the total dollar value of inventory. Each level of inventory requires different levels of
inventory control. That is, the higher the value of inventory, the higher the control. Such a
system generally requires less record-keeping and focuses managerial attention on the
most important inventory items.
13-5. The two basic inventory decisions are how much to order and when to order items for
inventory. In a continuous order system, whenever inventory decreases to a specific level
(referred to as the reorder point), a new order is placed for a fixed amount. Alternatively,
in a periodic inventory system, inventory on hand is counted at specific time intervals and
an order is placed for an amount that will bring inventory back to a desired level.
13-6. The categories are ordering cost, carrying cost, and shortage costs. As the order size
increases, ordering costs and shortage costs decrease while carrying costs increase.
13-7. The optimal order quantity occurs when the ordering cost equals carrying cost; thus, the
order quantity can be determined by equating these two cost functions and solving for the
optimal value.
13-8. Demand is known with certainty, shortages are not allowed, lead time for order receipts is
constant, and orders are received all at once. These assumptions are limiting to the extent
that they eliminate all uncertainty and potential variation in the model.
13-9. In a continuous inventory system, the reorder point is the inventory level at which a new
order is placed, and lead time is the time required to receive an order after it has been
placed.
13-10. In a noninstantaneous receipt model, the order quantity is received gradually over time
and the inventory level is depleted at the same time it is being replenished, whereas in the
basic EOQ model orders are received all at once.
13-11. The total purchase price of all items demanded must be included in the model, since the
differences in prices for different order sizes must be reflected in the model.
13-12. Price has no real impact on the optimal order size; it is a constant value that would not
alter the basic shape of the EOQ total cost curve.
13-13. The noninstantaneous receipt EOQ model would approach the basic EOQ model with
instantaneous receipt.
13-14. The service level is the probability that the amount of inventory on hand during the lead
time is sufficient to meet expected demand. The safety stock is the amount of inventory to
keep on hand necessary to achieve this probability.

Solutions to Problems

13-1. D 1500

Co $625

Cc $130

2Co D 2  625   1500 

Q  120.1
Cc 130
a.

Co D CcQ
TC  
b. Q 2


 625  1500    130   120.1 $15, 612.49
120.1 2

D 1500
 12.49 orders
c. Q 120.1

364
29.14 days
d. 12.49

13-2.

Case Q TC
 a 120.1 $14,051.25
b 120.1 $17,173.74
c 132.8 $15,534.24
d 108.6 $15,534.24

13-3. D 16,500

Co $70

Cc $27

2Co D 2  70   16,500 
Q  292.5
Cc 27
a.

Co D CcQ  70   16,500   27   292.5 

TC    
b. Q 2 292.5 2

$7,897.47

D 16,500
 56.41 orders
c. Q 292.5

320
5.67 days
d. 56.41

13-4. D 45, 000

Co $1,500

Cc $0.70

2Co D 2  1500   45, 000 

Q 
Cc 0.70

13,887.3 yd

Co D CcQ
TC  
Q 2
 
 0.70   13,887.3   1500   45, 000 
2 13,887.3

$9, 721.11

D 45, 000
Number of orders   3.24 per year
Q 13,887.3

365
Time between orders  112.6 days
3.24

13-5. D 1, 415, 000

Co $2, 200

Cc $0.08

2Co D
Q
Cc
a.

2  2, 200   1, 415, 000 

 278,971.3 yd
0.08

Co D CcQ
TC  
b. Q 2


 2, 200   1, 415, 000    0.08   278,971.3
278,971.3 2

$22,317.71

D 1, 415, 000
 5.07 per year
c. Q 278,971.3

365
72.0 days
d. 5.07

13-6. D 6, 000

d 23.08 / day
 p 116 / day

Co $700

Cc $9

a.

1, 079.41

Co D CcQ  d 
TC   1 
b. Q 2  p


 700   6, 000    9   1, 079.4   23.08 
1 
1079.4 2  116 

$7, 782.84

c.

d.

Q 1079.41
 9.31 working days
e. p 116

D  18   52  936
13-7.
 Co  $300   0.25  $75

Cc $250

2Co D 2  250   936 

Q 
Cc 75

79 bicycles

Co D CcQ
TC  
Q 2


 250   936    75  79 
79 2

$5,924.53

13-8. D 7, 000

Co $3, 600

Cc $50

L 10

2Co D
Q
Cc

Co D CcQ
TC  
Q 2

 7, 000   1004 
3, 600    50  
 1004   2 

$50,199.6
13-9. D 5, 000

Co $80

Cc $0.50

L 4

2Co D 2  80   5, 000 
Q  1, 264.9 boxes
Cc 0.50
a.

Co D CcQ  5, 000   1264.9 

TC   80    0.50  
b. Q 2  1264.9   2 

$632.46

 5, 000 
R dL    4  54.79 boxes
c.  365 

13-10.

d = 205 kg/day

p 350 lb / day

D 74,825

Co $175

Cc $12

2Co D 2  175   74,825 

Q  2295.18
 d  205 
Cc  1   12  1  
 p  350 
 Co D CcQ  d
TC   1  
Q 2  p


 175  74,825   12   2295.18   1  205 
 
2295.18 2  350 

$11, 410.32

13-11. d 1,800

p 3, 000

D 657, 000

Co $7,500

Cc $60

2Co D 2  7,500   657, 000 

Q  20, 263.88
 d  1,800 
Cc  1   50  1  
 p  3, 000 

Co D CcQ  d
TC   1  
Q 2  p

657, 000 20, 263.88  1,800 

 7,500    60   1
20, 263.88 2  3, 000 

$486,333.22

13-12. Operates 360 days/year

12 converters

5 tons coal/day/converter

D  5 tons   12 converters   360 days 

21, 600 tons / year

 Co $80

Cc 20%of average $ inventory level

Cc  0.20   $12  $2.40

2Co D 2  80   21, 600 

Q   1, 444, 000
Cc 2.4
a.

1, 200 tons

Cc D Co D  2.4   1, 200   80   21, 600 

TC    
b. 2 Q 2 1, 200

1, 440  1, 440 $2,880

LD 5  21, 600 
R  300 tons
c. 360 360

13-13. D 10, 000 logs / year

T 250 days / year

p 60 / day

R 60  250  15, 000 / year

Co $1, 600

Cc $15

2Co D 2  1, 600   10, 000 

Q 
 D  10, 000 
Cc  1    15   1  
a.  R  15, 000 

 6, 400, 000 2,529.8 logs

 Co D CcQ  D
TC   1  
b. Q 2  R


 1, 600   10, 000    15   2,529.8   10, 000  
  1  15, 000  
2,592.8  2  

6,324.5  6,324.5 $12, 648

D 10, 000
N  3.95 4 orders per year
c. Q 2,529.8

T 250
Tb   63.3 days between orders
N 3.95

d. Q 2,529.8, R 60

The number of operating days to receive the entire order is

Q 2,529.8
 42.2 days
r 60

13-14. a. D 12, 400

Cc $3.75

Co $2, 600

2Co D 2  2, 600   12, 400 

Q  4146.6
Cc 3.75

Co D CcQ
TC  
Q 2


 2, 600   12, 400    3.75  4,912.03
4,912.03 2

$15,549.92

b. Co $1,900
 Cc $4.50

2Co D 2  1,900   12, 400 

Q  3235.9
Cc 4.50

Co D CcQ
TC  
Q 2


 1,900   12, 400    4.50   3,833.19 
3,833.19 2

14,561.59

Select the new location.

13-15. a. d 220, 000

Cc= $0.12/kg

Co 620

p 305, 000

2Co D 2  620   220, 000 

Q 
 d
 0.12   1 
220 
Cc  1   
 p  305 

90,317.52

 d
maximum level Q  1    90,317.52   0.2787 
 p

25,170.46

Co D CcQ  d
TC   1  
Q 2  p

 620   220, 000    0.12   90,317.52 

  0.2787 
90,317.52 2
 $3020.45

b. P 360, 000

2  620   220, 000 

Q 76, 457.27
 220 
 0.12   1  
 305 

 620   220, 000    0.12   76, 457.27 

TC   0.25
76, 457.27 2

$3,568.01

No, the total inventory cost increases.

13-16. D 1400

Co $7, 600

Cc ?

Q 120

2Co D
Q
Cc

2  7, 600   1400 
120 
Cc

2  7, 600   1400 
 120  2 
Cc

Cc $1, 477.78

13-17. D 200 / day

Co $25

Cc $0.20 / min. $120 / day

 2  25   200 
Q 9.1 orders or 9
a. 120

The truck should carry approximately 9 orders each time it makes deliveries.

200
24 deliveries per day
9

10
0.416 hour every 25 minutes a delivery truck goes out to deliver orders
24

TC 
 25   200    120   8
8 2

$1095.45

b. Q 6

200
33.33 or 33 deliveries per day.
6

10
.30 hr. every 18 minutes a delivery truck is sent out.
33

TC 
 25   200    120   6 
6 2

$1193.73

13-18. Co $1, 700

Cc $1.25

D 21, 000 / yr.

P 30, 000 / yr.

2  1, 700   21, 000 

Q 13, 798.55
 21, 000 
1.25  1  
a.  30, 000 
 TC 
 1, 700   21, 000   1.25  13, 798.55   1  21, 000 
  
13, 798.55  2   30, 000 

5,174.46

D 21, 000
Number of production runs   1.52
Q 11, 062.62

 d
Maximum inventory level Q  1  
 p

 21, 000 
13, 798.55  1  
 30, 000 

4,139.57

b. Maximum inventory level 2,500

 21, 000 
2,500 Q  1  
 30, 000 

2,500 Q  .3

Q 8,333.33

 1, 700   21, 000   1.25  8,333.33 

TC     1  .70 
8,333.33  2 

$5,846.50

13-19. D 280, 000

C $7, 000

Cc $0.80 / ft.3

2  7, 000   280, 000 

Q
0.80
 70, 000 ft.3

TC 
 7, 000   280, 000   0.80  70, 000 
52,915 2

$56, 000

280, 000
Number of orders 
56, 000

4

13-20. D 40, 000

Co $800

Cc $1.90

Without discount:

2  800   40, 000 

Q 5,803.81
1.90

Co D Q
TC   Cc  PD
Q 2

 800   40, 000    1.90   5,803.81 

  3.40   40, 000 
5,803.81 2

147, 027.24

with discount of Q 20, 000

TC $140, 600

Take discount for Q 20, 000

13-21. D 10, 000

Co $300
 Cc $1.25

Order P

Size
0–4,999 $8.00
5, 000  $6.50

Without discount:

2Co D 2  300   10, 000 

Q  2,190.9
Cc 1.25

Co D CcQ
TC    PD
Q 2

 300   10, 000    1.25  2,190.9   10, 000

  8
2,190.9 2

$82, 738.61

With discount:

Q 5, 000

Co D CcQ
TC    PD
Q 2

 300   10, 000    1.25  5, 000   10, 000

  6.50 
5, 000 2

$68, 725

Select discount; Q 5, 000.

13-22.

Without discount:

Q 200

TC $55, 440
 With discount:

Q 300

P 52

Co D CcQ
TC    PD
Q 2

 160   900    7.20   300  

  52   900 
300 2

48,360

Take the discount, Q 300.

13-23. D 1, 700

Co $120

Cc  0.25   $38  $9.50

2Co D 2  120   1, 700 

Q  207
Cc  9.5

 120   1, 700    9.50   207  

TC   38   1, 700 
207 2

$66, 568.76

Q 300 :

 120   1, 700    9.31 300 

TC   37.24   1, 700 
300 2

$65,384.80

Q 500 :

 120   1, 700    9.12  500 

TC   36.48   1, 700 
500 2
 $64, 704

Q 800 :

 120   1, 700    9.025 800 

TC   36.10   1, 700 
800 2

$65, 235

Select Q 500; TC $64, 704.

2  120   1, 700 
Q 226
13-24.
 8

 120   1, 700    8  226  

TC   38   1, 700 
226 2

$66, 406.65

Q 300 :

 120   1, 700    8  300  

TC   37.24   1, 700 
300 2

$65,188

Q 500 :

 120   1, 700    8  500  

TC   36.48  1, 700 
500 2

$64, 424

Q 800 :

 120   1, 700    8  800  

TC   36.10   1, 700 
800 2

$64,825

Select Q 500; TC $64, 424.

13-25. D 6,500

Co $28

Cc $3

2Co D 2  28   6,500 
Q  348.32 348
Cc 3

 28   6,500    3  348  
TC   16   6,500 
348 2

$105, 045

Q 1, 000 :

 28   6,500    3  1, 000  
TC   14   6,500 
1, 000 2

$92, 682

Q 3, 000 :

 28   6,500    3  3, 000  
TC   13  6,500 
3, 000 2

$89, 060.67

Q 6, 000 :

 28   6,500    3  6, 000  
TC   12   6,500 
6, 000 2

$87, 030.33

Select Q 6, 000; TC $87, 030.33.

Q
 2   28  6,500  337.26 337 boxes
13-26. 3.20
  28   6,500    3.20   337  
TC   16   6,500 
337 2

$105, 079.20

Q 1, 000 :

 28   6,500    2.80   1, 000  

TC   14   6,500 
1, 000 2

$92,582

Q 3, 000 :

 28   6,500    2.60   3, 000  

TC   13  6,500 
3, 000 2

$88, 460.67

Q 6, 000 :

 28   6,500    240   6, 000  

TC   12   6,500 
6, 000 2

$85, 230.33

Select Q 6, 000; TC $85, 230.33.

13-27. d 4, 000

L 7

 d 600

R dL  Z d L

R 4, 000  7   1.64  600  7 30, 603.42

13-28. If safety stock 2, 000,

Z  600   7  2, 000, Z 1.26,

which corresponds to a 90% service level.

13-29. d 9, 000

 d 1,900

L 8

Z 2.05

R dL  Z d L

 9, 000   8    2.05   1,900  8

= 83, 016.7 kgs

13-30. d 20

 d 4

L 2 L = 12

Z 1.28

R dL  Z d L

 20   2   1.28  4  2 40  7.30

(20)(12) + 1.28(4)sqrt(12)

47.3 Litres =257.87 Litres

Safety stock = 7.3 Litres =17.87 Litres.

For service level of 95%

Z 1.65

Safety stock Z d L  1.65   4  2 9.33

=(1.65)(4)sqrt(12) = 22.86 Litres.
13-31.

For a 95% service level,

Safety stock Z d L 1.65  10   8  46.67

The reorder point increases to 286.7 Litres.

13-32. d 3.5

 d 1.2

L 25

Z 1.29

R dL  Z  d L

 3.5   25   1.29  1.2  25 87.5  7.74

R 95.24

Safety stock 7.74

13-33.
R dL  Z d L 3.5  8   1.29  1.2   8  32.38
Decision would be based on inventory holding cost, desire for low inventory, importance of
reliable delivery, cost of the monitors from each source, etc.

13-34 d 200

tb 30

L 4

 d 80

I 60
 Q d  tb  L   Z d tb  L  I

200  30  4   2.33  80  30  4  60

= 7,826.89 g

13-35. d 8
tb 10
L 3
 d 2.5
I 0
Q d  tb  L   Z d tb  L  I

8  10  3  2.33  2.5  10  3  0

122 pizzas

122  5 117 pizzas

13-36. d 18
tb 30
L 2
 d 4
I 25
Q d  tb  L   Z d tb  L  I

18  30  2   1.65  4  30  2  25

588.3 bottles

13-37.

% %
Unit Annual Annual Annual
Item Usage Cost Usage Value Usage Class
25 870 105 $91,350 15.97 10.43 A
% %
 23 30 2,710 81,300 14.21 0.36 A
20 19 3,200 60,800 10.63 0.23 A
22 12 4,750 57,000 9.97 0.14 A
24 24 1,800 43,200 7.55 0.29 A
16 60 610 36,600 6.40 0.72 A
5 18 1,900 34,200 5.98 0.22 A
10 67 440 29,480 5.15 0.80 B
12 682 35 23,870 4.17 8.18 B
2 510 30 15,300 2.68 6.11 B
4 300 45 13,500 2.36 3.60 B
1 36 350 12,600 2.20 0.43 B
27 750 15 11,250 1.97 8.99 B
9 344 28 9,632 1.68 4.12 B
29 46 160 7,360 1.29 0.55 B
26 244 30 7,320 1.28 2.92 B
28 45 110 4,950 0.87 0.54 B
13 95 50 4,750 0.83 1.14 C
30 165 25 4,125 0.72 1.98 C
18 270 15 4,050 0.71 3.24 C
6 500 8 4,000 0.70 5.99 C
7 710 4 2,840 0.50 8.51 C
21 910 3 2,730 0.48 10.91 C
17 120 20 2,400 0.42 1.44 C
19 45 50 2,250 0.39 0.54 C
8 80 26 2,080 0.36 0.96 C
3 50 23 1,150 0.20 0.60 C
11 510 2 1,020 0.18 6.11 C
15 820 1 820 0.14 9.83 C
14 10 3 30 0.01 0.12 C

8,342 571,957 100.00 100.00

% %

13-38.

Class Items Quantity $ Value % Value % Quantity

A 4, 5, 6, 13, 52 59,835 51 5.5
20,
22, 23, 30
B 7, 10, 14, 77 30,640 26 8.2
15, 19, 21
C 1, 2, 3, 8, 9, 811 27,493 23 86.3
 11,
12, 16, 17,
18,
24, 25, 26,
27,
28, 29, 31, 32
940 $117,968 100% 100%

13-39. d 2.6 packages/day

 d 0.8 packages/day
L 2 days
 L 0.5 days
Z 2.33
R d L  Z  d2 L   L2 d 2

 2.6   2   2.33  .8  2   .5   2.6  2

2 2

9.22 packages of paper

13-40. d 6/hr.
 d 2.5/hr.
L 0.5 hr.
 L .133 hr.
Z ?
R d L  Z  d2 L   L2 d 2
a.

1  6   0.5   Z  2.5 2  0.5   .133 2  6  2

1 3  Z  1.94 

 2 Z  1.94 

Z  1.03

Service level .5000  .3485 .1515 15.15%

R 3   2.05   1.94 
b. = 6.977 pizzas

CASE SOLUTION 13.1: The Instant Paper Clip Office Supply Company
Supply Company

D $17, 000 / day $5,185, 000/ year  305 day year 

Cc $0.09 / dollar / year $0.09

Co $1, 200 / loan  0.0225Q

L 15 days

Optimal loan amount per loan:

Q
2Co D

 2   1, 200   5,185, 000 
Cc 0.09

$371,842.26 loan amount per loan

Memo:

The 0.0225Q cost per loan is not included in the calculation of Q since it is paid on the entire dollar
amount of the loan regardless of loan size, and thus it is simply an annual cost, i.e., 0.0225 D.
D Q
TC Co  Cc  0.0225D
Q 2

 5,185, 000   371,842 

 1, 200      0.09   
 371,842   2 

  0.0225   5,185, 000 

$150,128.30 total cost of borrowing

D 5,185, 000
N  13.944 loans / year
Q 371,842

14 loans/year for about $371, 000 per loan

r  15   17, 000  $255, 000 reorder point

When cash balance gets down to $255,000 initiate another loan.

Quantity Discount Analysis:

If Q  $500, 000; points 2%

Since Q is unaffected by points, and Q was $371,842; we know we must set Q $500, 000 for this
alternate option.

D Q
TC Co  Cc  0.02 D
Q 2

 5,185, 000   500000 

 1, 200      0.09   
 500, 000   2 

  0.02   5,185, 000 

12, 444  22,500  103, 700 $138, 644

$11, 484  150,128  138, 644  ;

Since this option yields a lower TC of it should be accepted.
CASE SOLUTION 13.2: The Saskatchewan roughriders apparel Store

The objective of this case problem is to determine the reorder point with variable demand. The
first step is to complete the average demand and standard deviation from the data provided in the
problem. This is a good opportunity to allow students to use a statistical software package (if
they have access to one) to compute these statistics.

d 42.57 hats per week

 10.41 hats per week

L 20 days 2.86 weeks

The first question is, if R 140, what level of service does this correspond to. Thus, we are seeking Z
as follows
140 dL  Z d L

140  42.57   2.86   Z  10.41 2.86

140 121.75  Z  17.6 

Z 1.04

This Z value corresponds to a normal probability value of 0.8508, thus, the service level is

approximately 85.1 percent. The desired service level is 99 percent

 Z 2.33 . The reorder point and
safety stock for this service level is determined as follows.
R dL  Z d L

R  42.57   2.86   2.33  10.41 2.86

140 121.75  41.02

R 162.76 or 163 hats

The manager could determine the order size with EOQ analysis by using the average demand, d, as D
in the EOQ formula. However, she would also need the ordering and carrying costs. It is likely that the
ordering cost is relatively high as compared to carrying cost since the hats are shipped from Jamaica
while it would probably not be very expensive to store hats (given their small size and weight).
CASE SOLUTION 13.3: Cambridge Foods Company

This problem requires the development of a forecast for product demand in year 4 (see chapter 11). A
seasonal forecast was developed, as follows.

Jan– April– June– Nov-

Year Sept Oct Total
March May Aug Dec
1 607 488 479 256 342 524 2696
2 651 487 660 263 370 537 2968
3 685 539 672 302 411 572 3181
Total 1943 1514 1811 821 1123 1633 8845

S1  0.220
S2  0.171
S3  0.205
S4  0.093
S5  0.127
S6  0.185

Linear trend line forecast: y 2463.3  242.5 x

y  4  3433.33 cases

SF1  754.21
SF 2  587.68
SF 3  702.97
SF 4  318.68
SF 5  435.91
SF 6  633.88
Total 3433.3

2  4700   3433.33
Q 527.5
116

Comparing monthly forecasts (with seasonal pattern) with order size, Q, using order frequency of 2
months:
D 3433.3
No. of orders   6.5 orders
Q 527.5
52 weeks
8 weeks  2 months  per order
6.5 orders

Monthly Forecast Balanc

e
792 January 251 541
February 251 289
528 March 251 566
April 294 272
528 May 294 506
June 234 272
528 July 234 565
August 234 331
528 Septembe 318 541

r
October 436 105
528 Novembe 317 316

r
Decembe 317 1

r
Total 3433

Note that the “.5” order was added to the first month. The order size
 Q 528 seems to be adequate
to offset seasonal patterns.

Ingredient orders:

Chocolate

D 108,140 lbs. (3433.3 cases 60 bags/case 205,980 bags;

205,980 bags 12 bars / bag 2, 471, 760 bars;

Demand 2, 471, 760 bars 0.70 oz chocolate / bar

1, 730, 252 oz 108,140 lbs.)

Co $5, 700

Cc $0.45 / lb.
 Q 52,340

TC  1 $353,380, Q 52,340

TC  2  $337,159, Q 52,340

TC  3 326, 048, Q 100, 000

TC  4  $319, 023, Q 150, 000*Optimal

Nuts

D 77, 242 lb.

Co $6,300

Cc $0.63 / lb.

Q 39,304 lbs.

TC  1 $526,834, Q 39,304

TC  2  $507,524, Q 39,304

TC  3 $488,591, Q 70, 000*Optimal

Filling

D 61, 794 lb.

Co $4,500

Cc $0.55

Q 31, 799

TC  1 $110,180, Q 31, 799

TC  2  $101,373, Q 40, 000*Optimal

TC  3 $102, 718, Q 80, 000

Cambridge Foods Company might experience quality problems with its large orders for ingredients
that take advantage of price discounts; ingredients may be in storage for long periods. Also, the demand
forecast is treated with certainty; if significant variation occurs it could create shortages and the need for
safety stocks. Lead times are considered negligible, which could also create problems along the supply
chain if they are significant in reality.