Tutorial 5 Solutions: Inventory Management I

1. Inventories are held (1) to take advantage of economy of scale (3) to provide a certain
level of customer service/ to cope with demand uncertainty, (4) because production
requires some in-process inventory, (5) to hedge price difference, 6) to hedge
temporary imbalance between supply and demand, and (7) to ensure independence of
operations
2. As the carrying cost increases, holding inventory becomes more expensive.
Therefore, in order to avoid higher inventory carrying costs, the company will order
more frequently in smaller quantities because ordering smaller quantities will lead to
carrying less inventory.
3. A few aspects can be considered:
How important is the item? For example, does it relate to a holiday or other
important event, such as graduation cards?
Are comparable substitutes readily available?
What competitor alternatives are available to customers?
Is this an occasional occurrence, or indicative of a larger, perhaps ongoing,
problem?
4. a. See the table below.

Item
K34
K35
K36
M10
M20
Z45
F14
F95
F99
D45
D48
D52
D57
N08
P05
P09

Unit
Cost
10
25
36
16
20
80
20
30
20
10
12
15
40
30
16
10

Dollar
Usage Usage

Category

200 2,000 C
600 15,000 A
150 5,400 B
25
400 C
80 1,600 C
200 16,000 A
300 6,000 B
800 24,000 A
60 1,200 C
550 5,500 B
90 1,080 C
110 1,650 C
120 4,800 B
40 1,200 C
500 8,000 B
30
300 C

b. To allocate control efforts.

c. It might be important for some reason other than dollar usage, such as cost of
a stockout, usage highly correlated to an A item, etc.
5.

D = 4,860 bags/yr, S = $10, H = $75/bag/yr

a. Q* = 2DS = 2(4,860)10 = 36 bags
H

75

b. Q*/2 = 36/2 = 18 bags

c.

D
4,860 bags
=
= 135 orders
*
Q 36 bags / orders

d. TCC =
=

Q*
D
H+ *S
2
Q

36
4,860
(75) +
(10) = 1,350 + 1,350 = $2,700
2
36

e. Using S = $11, Q* =

2(4,860)(11)
= 37.757
75

Round up, Q* = 38

38
4,860
(75) +
(11) = 1, 425 + 1, 406.84 = $2,831.84
2
38
Increase by [$2,831.84 $2,700] = $131.84
TCC =

If not rounding,
37.757
4,860
TCC =
(75) +
(11) = 1, 415.89 + 1, 415.90 = $2,831.79
2
37.757
Increase by [$2,831.79 $2,700] = $131.79
6.

D = 750 pots/mo. x 12 mo./yr. = 9,000 pots/yr.

P = $2/pot, S = $20, H = ($2)(.30) = $.60/unit/year

2DS
2(9,000)20
=
= 774.60 775
H
.60
775
9, 000
TCC =
(.60) +
(20)
2
775
TCC = 232.5 + 232.26
= 464.76
If Q = 1500

a. Q* =

1,500
9,000
(.6) +
(20)
2
1,500
TCC = 450 + 120 = $570
Therefore the additional cost of staying with the order size of 1,500 is:
$570 $464.76 = $105.24
b. Only about one half of the storage space would be needed.
TCC =

7.

H = $2/unit/month
S = $55
D1 = 100/month (months 16)
D2 = 150/month (months 712)
a. Q* =

2DS
H

D1 : Q* =
D2 : Q* =

2(100)55
= 74.16 , round up, Q*=75
2
2(150)55
= 90.83 , round up, Q*=91
2

b. Discount of $10/order is equivalent to S 10 = $45 (revised ordering cost)

16 TCC75 = $148.32

50
100
(2) +
(45) = $140 *
2
50
100
100
TCC100 =
(2) +
(45) = $145
2
100
TCC50 =

712 TCC91 = $181.66

50
150
(2) +
(45) = $185
2
50
100
150
TCC100 =
(2) +
(45) = $167.5*
2
100
TCC50 =

8.

D = 27,000 jars/month

H = $0.18/jar/month
S = $60

2DS
2(27,000)60
=
= 4, 242.64 4, 243.
H
.18
Q
D
TCC= H + S
2
Q

a. Q* =

 27,000
4,000
TCC4000 =
(60) = 765
(.18) +
2
4,000
27,000
4,243
TCC4243 =
60 = 763.68
(.18) +
2
4,243
Penalty: 765-763.68= 1.32.

b. Current:
For

D 27,000
=
= 6.75
Q 4,000

D
to equal 10, Q must be 2,700
Q

Q=

2DS
So 2,700 =
H

2(27,000)S
.18

Solving, S = $24.30
c. The carrying cost happened to increase rather dramatically from $.18 to
approximately $.3705.
2DS
2(27,000)50
Q* =
= 2,700 =
H
H
Solving, H = $.3705