Question 1: Inventory position

Formulation
I nventory position = On-hand + Scheduled receipts − Backorders

Example:
Demand = 50u/day

On-hand = 40u

Back order = 30u

Scheduled receipts = 200u (Can be called in-transist inventory)

I nventory position = On-hand + Scheduled receipts − Backorders = 40 + 200 − 30 = 210

If ask about when to order: compare between Inventory position and on hand if Inventory position is larger, no need to place order.

Question 2: Placing new order when lead time constant, demand variable
Formulation
Standard deviation of average during lead time (σ dLT ) = σ D ∗ √ L

Saf ety stock = z ∗ σ dLT

¯ ∗ L + Saf ety stock

Reorder point = (Average demand ∗ Lead time) + Saf ety stock = d

Example
Service level is 99% => z = 2.33

¯
Average demand (d) = 15u/day

Standard deviation of demand = 3u

EOQ = 120

Lead time = 7 days

Standard deviation of average demand during lead time(σ dLT ) = σ D ∗ √ L = 3 ∗ √ 7 = 7.94u

Saf ety stock = z ∗ σ dLT = 2.33 ∗ 7.94 = 18.5u

¯ ∗ L + Saf ety stock = 15 ∗ 7 + 18.5 = 123.5 ≈ 124

Reorder point = d

Question 3: Placing new order when lead time and demand variable
Formulation
Standard deviation of average lead time (σ dLT ) = √ L̄ ∗ σ
2 ¯2 ∗ σ 2
∗ d
D LT

Saf ety stock = z ∗ σ dLT

¯ ∗ L + Saf ety stock

Reorder point = (Average demand ∗ Lead time) + Saf ety stock = d

L̄ : Average lead time

σ LT : Standard deviation of lead time

¯
d : Average demand

σ D : Standard deviation of demand

Example
Service level is 98% => z = 2.06

¯ = 10000u
d

σ D = 1800u

L̄ = 6 wks

σ LT = 2 wks

¯2 ∗ σ 2 2 2
= √ 6 ∗ 1800 + 10000 ∗ 2 = 20480.23
2 2
Standard deviation of average lead time (σ dLT ) = √ L̄ ∗ σ ∗ d
D LT

Saf ety stock = z ∗ σ dLT = 2.06 ∗ 20480.23 = 42189.27u

¯ ∗ L + Saf ety stock = 10000 ∗ 6 + 42189.27 = 102189.27

Reorder point = d

Question 4A: In-transit inventory transportation based

Formulation
 throughput transport time
I n-transit inventory quantity = ∗
period length day (24hrs/day)

period length
I n-transit inventory cost = I n-transit inventory quantity ∗ product value ∗ holding cost% ∗
365

Note:
Throughput: qty on container
Transport time is service hours
Product value: Unit prices

Example
F low unit (T hroughput) = 1200000

Days period = 60 days

Average operation hours = 10 hours

U nit price = 200

H olding cost = 15%

throughput transport time 1200000 10
I n-transit inventory quantity = ∗ = ∗ = 8333u
period length day (24hrs/day) 60 24

60
I n-transit inventory cost = 8333 ∗ 200 ∗ 15% ∗ = 41094
365

Question 4B: In-transit inventory production based

Formulation
production f low units ∗ minimum (production lead time,time remaining in the model horizon)
I n-transit inventory quantity =
2∗period length

period length
I n-transit inventory cost = I n-transit inventory quantity ∗ product value ∗ holding cost% ∗
365

Example
P roduction unit (T hroughput) = 5000000

Days period = 60 days

P roduction lead time = 7 days

Delivery time = 10 days

H olding cost = 12%

 5000000∗ minimum (7,10) 5000000∗7
I n-transit inventory quantity = = = 291666.67
2∗60 2∗60

60
I n-transit inventory cost = 291666.67 ∗ 2 ∗ 12% ∗ = 11506.84
365

Question 5: Quantity discount

Formulation
EOQ can be expressed as Q as follow:
$Q^ = \sqrt{\frac {2DA}{S}}$

Total inventory cost (total annual cost/total relevant cost):

Total inventory cost = total holding cost + total ordering cost + total procurement cost + total saf ety stock cost
Q
Total holding cost (Total carrying cost) = ∗ S
2

D
Total ordering cost = A ∗
Q

Total procurement cost = D ∗ V

Total saf ety stock cost = SS ∗ S

Notation :
- Q = Quantity order/Ordering size/ lot size (units)
- D = Annual rate of demand (units/unit time)
Anh's note: it can be expressed as D = Demand rate of unit , take note unit time can be varied year or month, etc.
- SS = Saf ety stock (untis)
- S (Inventory holding cost) = V ∗ H

- V = Unit prices (dollars/unit)

Anh's note: it can be varied dollars per pallets, dollars per cases, etc.
- H = Carrying cost/holding cost per unit per year (dollars/unit/year)
- A = Ordering cost/f ixed cost per order
- TAC = total annual cost/total inventory cost/total relevant cost

Instruction steps and example

Step 1: Calculate initial Q* for each level of discount
D = 500u/wk = 500 ∗ 52 weeks = 15600 unitsperyear

Cost per order = $20

W ith checking inspection time per order = 30 mins & cost $20 per order

20
=> F ixed order cost (A) = 20 + = $30
2

H olding cost (h) = 0.15

Currentpolicy = 400u

Level Order Qty (q )i Price EOQ (Q*)

1 1 − 499 25 Q
∗
= √
2∗15600∗30
= 499.59
0.15∗25

2 500 − 999 24 Q
∗
= √
2∗15600∗30
= 509.9
0.15∗24

3 1000 − 1999 23 Q
∗
= √
2∗15600∗30
= 520.87
0.15∗23

4 2000 − 4999 22 Q
∗
= √
2∗15600∗30
= 532.58
0.15∗22

5 5000 − more 21 Q
∗
= √
2∗15600∗30
= 545.11
0.15∗21

Step 2: Adjusted Q** for each level of discount

For each level (i), we will consider the following rules:
∗ ∗∗
If Q < min(q i ) then Q = qi

∗ ∗∗ ∗
If Q in range of q i then Q = Q

∗
If Q > min(q i ) then eliminate f or f urther consideration

Level Order Qty (q )i Price EOQ (Q*) Adjusted Qty (Q**)

1 1 − 499 25 Q
∗
= √
2∗15600∗30
= 499.59
Eliminated
0.15∗25

2 500 − 999 24 Q
∗
= √
2∗15600∗30
= 509.9
509.9
0.15∗24
 Level Order Qty (q ) i Price EOQ (Q*) Adjusted Qty (Q**)
3 1000 − 1999 23 Q
∗
= √
2∗15600∗30
= 520.87
1000
0.15∗23

4 2000 − 4999 22 Q
∗
= √
2∗15600∗30
= 532.58
2000
0.15∗22

5 5000 − more 21 Q
∗
= √
2∗15600∗30
= 545.11
5000
0.15∗21

Step 3: Calculate TAC of Q** for each level of discount

Level Order Qty (q ) i Price EOQ (Q*) Adjusted Qty (Q**) Total cost
1 1 − 499 25 499.59 Eliminated
2 500 − 999 24 509.9 509.9 T AC 2 =
15600

509.9
∗ 30 +
509.9

2
∗ 0.15 ∗ 24 + 15600 ∗ 24 = 376235.6

3 1000 − 1999 23 520.87 1000 T AC 3 =

15600

1000
∗ 30 +
1000

2
∗ 0.15 ∗ 23 + 15600 ∗ 23 = 360993

4 2000 − 4999 22 32.58 2000 T AC 4 =

15600

2000
∗ 30 +
2000

2
∗ 0.15 ∗ 22 + 15600 ∗ 22 = 346734

5 5000 − more 21 545.11 5000 T AC 5 =

15600

5000
∗ 30 +
5000

2
∗ 0.15 ∗ 21 + 15600 ∗ 21 = 335568.6

Step 4: Choose the least TAC of Q**

In this case, we choose level 5 which T AC 5 = 335568.6 and the EOQ will be 5000

Question 6: Manage slow moving class A-item

Formulation
Use Q = 1 if D̄ < 0.0763 ∗ v

ch H olding cost rate ∗ unit price

Ratio of carrying cost = =
D∗B 2 Annual demand ∗ Backorder cost (B 2 )

Example
U nit price (v) = 2000

Annual demand (D) = 100

6
Lead time (LT ) = 6 wks = ≈ 0.12 year
52

H olding cost rate (h) = 0.25

Order cost (A) = 10

Backorder cost (B 2 ) = 0.2 = 0.2 ∗ 2000 = 400

D̄ = 100 ∗ 0.12 ≈ 11.5 < 0.0763 ∗ v = 0.0763 ∗ 2000 = 152.6

¯
152.6 > D then Q = 1
ch H olding cost rate ∗ unit price 2000∗0.25
Ratio of carrying cost = = = = 0.0125
D∗B 2 Annual demand ∗ Backorder cost (B 2 ) 100∗400
k −k
λ ∗e
P oisson distribution calculation = !
k

Decision rule:
P r(X=s+1) ch
=
P r(X≤s+1) D∗B 2
s+1 −(s+1)
λ ∗e
P r(X = s + 1) = !
s+1

Where
k = s + 1

λ = average demand

On the P r(X = s + 1), we use Individual Poisson Probabilities where row we use value k and column we use value λ.
On the P r(X ≤ s + 1), we use Cumulative Poisson Probabilities where row we use value k and column we use value λ.

We choose the value that just barely over the ratio of carrying cost.

Question 7: Manage fast moving class A-item

Formulation
EOQ can be expressed as Q as follow:
$Q^ = \sqrt{\frac {2DA}{S}}![[P astedimage20241222230431.png]]Reorder\ point = \bar{D}+k*\sigma_L$

Instruction steps and example

U nit price (v) = 25

Annual Demand (D) = 1200 sacks

Demand during lead time (D̄) = 150 sacks

Standard deviation of demand during LT (σ dLT ) = 40 sacks

H olding rate (h) = 0.15

F ixed cost per order (A) = 5

Backcost per occasion (B 1 ) = 50

Calculate until Q n = Q n−1

Iteration Q k p value
1 56.57 1.44 0.9251
2 74.81 1.23 0.8907
3 81.84 1.16 0.8760
4 84.68 1.125 0.8697
5 85.84 1.11 0.8665
6 86.44 1.11 0.8665
7 86.44 1.11 0.8665