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Tutorial 2-Inventory Management Questions

The document discusses inventory management concepts like EOQ, reordering level, minimum level, maximum level, average stock level, safety stock, and service level. It contains sample problems and solutions related to calculating these parameters under different demand scenarios.

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Ayush Kishore
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114 views

Tutorial 2-Inventory Management Questions

The document discusses inventory management concepts like EOQ, reordering level, minimum level, maximum level, average stock level, safety stock, and service level. It contains sample problems and solutions related to calculating these parameters under different demand scenarios.

Uploaded by

Ayush Kishore
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Operation And Supply Chain Management (IBM-311)

TUTORIAL 2

INVENTORY MANAGEMENT

Q 1) A manufacturer uses Rs. 10,000 worth of an item during the year. He has
estimated the ordering costs as Rs.25 per order and carrying costs as 12.5% of average
inventory value. Find the optimal order size, number of orders per year, time period per
order and total cost.

Q 2) An item is used at a uniform rate of 50,000 units per year. No shortage is allowed
and delivery is at an infinite rate. The ordering, receiving and hauling cost is Rs. 13 per
order, while inspection cost is Rs. 12 per order. Interest costs Rs. 0.056 and
deterioration and obsolescence cost Rs. 0.004 respectively per year for each item
actually held in inventory plus Rs. 0.02 per year per unit based on the maximum
number of units in inventory. Calculate the EOQ. If lead time is 20 days, frnd re-order
level
Q 3) The demand for an item each costing Re 1, is 10,000 units per year. The ordering
cost is Rs. 10. Inventory carrying charge is 20% based on the average inventory per year.
Stock-out cost is Rs. 5 per unit of shortage incurred. Find various parameters

Q 4) A unit is used at the rate of 100 per day and can be manufactured at a rate of 600
per day. It costs Rs. 2000 to set up the manufacturing process and Rs. 0.1 per unit per
day held in inventory based on the actual inventory any time. Shortage is not allowed.
Find the minimum cost and the optimum number of units per manufacturing run.
Q 5) Annual demand for an item is 2400 units. Ordering cost is Rs. 350, inventory
carrying charge is 24% of the purchase price per year. Purchase prices are:

P1 = Rs. 10 for purchasing Q1 < 500

P2 = Rs. 9.25 for purchasing 500 =<Q2= < 750

P3 = Rs. 8.75 for purchasing 750 =<Q3

Determine the optimum purchase quantity.


Q 6) Consider above question with thc ordering cost of Rs. 100 only

Q 7) From the following calculate (i) Re-ordering Level and (ii) Minimum
Level
Minimum usage 100 units per week Normal usage 200 units per
week

Maximum usage 300 units per week Re-order period 4 to 6 weeks

Solution

(i) Re-ordering Level


Re-ordering level= Maximum consumption * Lead Time [maximum]
Re-ordering level= 300 * 6
Re-ordering level= 1,800 Units per week

(ii) Minimum Level


Minimum level= Reorder level – (Average consumption x lead time [Average])
Minimum level= 1,800 – (200 x 5)
Minimum level= 1,000 Units per week

Q8) Calculate Ordering Level, Minimum Level and Maximum Level from
the following data:

Re-order quantity 1,500 units Re-order


period 4 to 6 weeks
Maximum consumption 400 units per week Average
consumption 300 units per week
Minimum consumption 250 units per week
Solution
(i) Ordering Level
Ordering level= Maximum consumption * Lead Time [maximum]
Ordering level= 400 * 6
Ordering level= 2,400 Units per week
(ii) Minimum Level
Minimum level= Reorder level – (Average consumption x lead time [Average])
Minimum level= 2,400 – (300 x 5)
Minimum level= 900 Units per week

(iii) Maximum Level


Maximum stock level= Reorder level – (Min consumption * Lead time [minimum]) +
EOQ
Maximum stock level= 900 – (250 * 4) + 1,500
Maximum stock level= 2,400 – (1,000) + 1,500
Maximum stock level= 2,900 Units per week

Q 9) The following information is available in respect of component DP 5:


Maximum stock level 8,400 units
Budgeted consumption- maximum 1,500 units per month
Budgeted consumption- minimum 800 units per month
Estimated delivery period Maximum 4 months and minimum 2
months
You are required to calculate Re-order level
Solution
Ordering Level
Ordering level= Maximum consumption * Lead Time [maximum]
Ordering level= 1,500 * 4
Ordering level= 6,000 Units per week

Q 10) From the following date for the last twelve months, compute the Average Stock
Level for a component.
Maximum usage in a month 300 units Minimum usage in a
month 200 units
Average usage in a month 225 units Re-ordering quantity 750
units
Time lag procurement of material Maximum 6 months and Minimum 2
months
Solution
Average Stock Level
Average Stock Level = Minimum Stock Level + ½ of EOQ
Minimum level= Reorder level – (Average consumption x lead time [Average])
Re-ordering level= Maximum consumption * Lead Time [maximum]

Re-ordering level= Maximum consumption * Lead Time [maximum]


Re-ordering level= 300 * 6
Re-ordering level= 1,800 Units per month

Minimum level= Reorder level – (Average consumption x lead time [Average])


Minimum level= 1,800 – (225 x 4)
Minimum level= 900 Units per month

Average Stock Level = Minimum Stock Level + ½ of EOQ


Average Stock Level = 900 + ½ (750)
Average Stock Level = 1,275 Units per month

Q 11) An auto parts supplier sells Hardy-brand batteries to car dealers and auto
mechanics. The annual demand is approximately 1,200 batteries. The supplier pays $28
for each battery and estimates that the annual holding cost is 30 percent of the battery’s
value. It costs approximately $20 to place an order (managerial and clerical costs). The
supplier currently orders 100 batteries per month.
a. Determine the ordering, holding, and total inventory costs for the current order
quantity.
b. Determine the economic order quantity (EOQ).
c. How many orders will be placed per year using the EOQ?
d. Determine the ordering, holding, and total inventory costs for the EOQ. How has
ordering cost changed? Holding cost? Total inventory cost?

Q 12) Upon closer inspection, the supplier determines that the demand for batteries is
normally distributed with mean 4 batteries per day and standard deviation 3 batteries
per day. (The supplier is open 300 days per year.) It usually takes about 4 days to
receive an order from the factory.
a. What is the standard deviation of usage during the lead time?
b. Determine the reorder point needed to achieve a service level of 95 percent.
c. What is the safety stock? What is the holding cost associated with this safety stock?
d. How would your analysis change if the service level changed to 98 percent?
Q 13) Foster Drugs, Inc., handles a variety of health and beauty aid products. A
particular hair conditioner product costs Foster $2.95 per unit. The annual holding cost
rate is 20 percent. Using an EOQ model, they determined that an order quantity of 300
units should be used. The lead time to receive an order is one week, and the demand is
normally distributed with a mean of 150 units per week and a standard deviation of 40
units per week.
a. What is the reorder point if the firm is willing to tolerate a 1-percent chance of a
stockout during an order cycle?
b. What safety stock and annual safety stock cost are associated with your
recommendation in part a?
c. Foster is considering making a transition to a periodic-review system in an attempt to
coordinate ordering of some of its products. The review period would be two weeks and
the delivery lead time would remain one week. What target inventory level would be
needed to ensure the same 1-percent risk of stockout?
d. What is the safety stock associated with your answer to part c? What is the annual
cost associated with holding this safety stock?
e. Compare your answers to parts b and d. If you were the manager of Foster Drugs,
would you choose a continuous- or periodic-review system?

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