Name : I Made Wiratha Nungrat NIM : 13209057

Homework 5 Problem 4.5. A Stationery supplies is considering installing an inventory control system. The store carries about 1,400 different inventory item and has annual gross sales of about $ 80,000. The inventory control would cost $ 12,500 to install and about $ 2,000 per year in additional supplies, time and maintenance. If the saving can be represents as a fixed percentage of annual sales, what would that percentage have to be in order for the system to pay itself in five years or less? Answer: Given : Annual sales or Revenue: $ 80,000 Inventory: 1400 items Setup cost + additional cost: $ 12,500 + 5* $ 2,000 = $ 22,500 Annual mean cost of inventory control system is $ 4,500, percentage have to be in order for the system to pay itself in five years or less is: 4,500 100% = , % 80,000 Problem 4.15. Davids Delicatessen flies in Hebrew National Salamis regularly to satisfy a growing demand of salamis in Silicon Valley. The demand is pretty steady about 175 per month. The salamis cost $ 1.85 each. The fixed calling cost or setup cost is $ 200. It takes 3 weeks to receive the order. Annual cost of capital is 22 percent, a cost of shelf space is 3 percent and 2 percent for taxes and insurance. a. How many salamis should Gold have flown in and how often he should order them? Answer: Demand, monthly = 175 Pcs/month Variable cost, c = $ 1.85 Order cost, K = $ 200 Annual charge: Cost of Capital = Cost of Storage = Taxes and Insurance = Total Interest charge = 22% 3% 2% 27 %

We address this problem using EOQ model, Annual demand, = 175 12 = 2,100 Holding cost, = . = 0.27 1.85 = 0.4995 Amount of salamis should Gold have flown in: 2. . =

22002100 0.4995

= , Cycle time for order: = =

1,297 2,100

= . = . b. How many salamis should Gold have in hand when he phones his brother to send another salamis? Answer: Because the Lead time is much smaller than cycle time, 3 weeks < 7.4 months, we use simple calculation to calculate the inventory level at time Gold must reorder it again: = 3 weeks = 0.0576 Years Reorder, = . = 2,100 0.0576 = c. If the Salamis sell for $ 3 each, are the Salamis profitable? If so, what annual profit can he expect? Answer: If the salamis sell $ 3 each, the revenue Gold earned is: Revenue = $ 3 2,100 = $ 6,300 Then the budget for keep the company going: Capital, = $ 1.85 2,100 = $ 3,885 Order cost, = 0.61
200

= 324.32

Holding cost, = 27% = 0.27 $ 3883 = $ 1048.95 Total budget for salamis company is = 3,885 + 324.32 + 1048.95 = $ 5,258.27. So, the profit that he can get from this sales is $ 6,300 - $ 5,258.27 = $ 1041.73

d. If the salamis have a shelf life for only 4 weeks, what is the trouble with that policy? What policy would Gold have to use in that case? Is the item still profitable? Answer: If the salamis shelf life only for 4 weeks, the trouble is Gold cannot order it every 7.4 weeks from his brother. So he need new policy to keep it running, the new policy maybe that he must reorder it every 4 weeks. = 4 = 0.0769 = . = 0.0769 2,100 = 162 So with new policy, Gold must reorder the salamis every 4 weeks with 162 items If Gold use that policy, Capital, = $ 1.85 2,100 = $ 3,885 Order cost, = 13 $ 200 = $ 2,600 Holding cost, = 27% = 0.27 $ 3883 = $ 1048.95 Total budget for salamis company is = 3,885 + 2,600 + 1048.95 = $ 7533.95. So, the profit that he can get from this sales is $ 6,300 - $ 7,533.95 = - $ 1,233.95. From this new policy or scenario, Gold is losing money or this policy is bad and not profitable Problem 4.17. The Wod Chemical Company produces a chemical compound that is used as a lawn fertilizer. The compound can be produced at a rate of 10,000 pound per day. Annual demand for the compound is 0.6 million pound per year. The fixed setup cost for run the production is $ 1,500, and the variable cost of production is $ 3.50 per pound. The company uses and interest rate of 22 percent to account for the cost of capital, and cost of storage and handling of the chemical amount to 12 percent of the value. a. What is the optimal size of the production run for this particular compound? Answer: Compound production = 10,000 pound/day = 2,500,000 pound/year (250 working days) Demand of compound = 600,000 pound/year Setup cost = $ 1,500 Variable cost = $3.5 per pound Annual charge: Cost of Capital = 22% Cost of Storage = 12% Total Interest charge = 34 %

Holding cost, = . = 0.34 3.5 = 1.19 Because production rate is assume infinite and the company did not need to order or internally produce the compound, we need to modified the holding cost, = (1 ) 600,000 = 1.19 (1 ) 2,500,000 = 0.9044 So, the optimal size of the production run could be calculate using EOQ, 2. . = 2 1,500 600,000 = 0.9044 = , . = 2401

Optimal

b. What is the proportion of uptime and downtime? Answer: Cycle time, = = 44,612.43 600,000 = 0.0743 Uptime, 1 = 44,612.43 = 2,500,000 = . Downtime, 2 = 1 = 0.0743 0.0178 = . The proportion of uptime and downtime, , 1 0.0178 = , 2 0.0565 23.95 = 76.05 c. What is the average annual cost of holding and setup attributed to this item? If the compound sells for $ 3.9 per pound, what is the annual profit the company is realizing from this item?

Answer: Annual holding cost and setup cost can be written mathematically as: . ( ) = + 2 1,500600,000 0.904444,612.43 = 44,612.43 + 2 = 20,173.75 + 20,173.75 = $ , . If the compound sold $ 3.9 per pound, then the revenue from this sales, = 3.9 600,000 = $ 2,340,000 Capital budget, , = 3.5 600,000 = $ 2,100,000 Total capital cost for a year: $ 2,100,000 + $ 40,347.48 = $ 2,140,347.48 From this result as we see that Wod chemical company still get a profit from compound sales, = $ 2,340,000 $ 2,140,347.48 = $ , .

Problem 4.22 A Purchasing agent for a particular type of silicon wafer used in the production of semiconductor must decide among three sources. Source A will sell the silicon wafers for $2,5 per wafer, independently of the number of wafer ordered. Source B will sell the wafers for $2,4 for an order for not fewer than 3000 pcs, Source C will sell the wafers for $2,3 each but not accept an order below 4000 pcs. Assume the setup cost $100, and annual demand of 20.000 wafers. Assume holding cost of 20 percent annual interest. a. Which source should be used, what is the size of the standing order? Answer: Annual demand, = 20.000 wafers 2,5 () = {2,4 2,3 0 < 3.000 3.000 < 4.000 4.000

Setup cost, K = $100 Holding cost, h = 20% annual interest rate 0 = 2,5, 1 = 2,4, 2 = 2,3 The first step is to compute the EOQ values corresponding to each of the unit cost, 2. . (0) = . 0

2 100 20.000 = 0,2 2,5 = 2.828,42 = 2.829 2. . (1) = . 0 2 100 20.000 = 0,2 2,4 = 2.886,75 = 2.887 2. . (2) = . 0 2 100 20.000 = 0,2 2,3 = 2.948,83 = 2.949 We say the EOQ value is realizable if it falls within the interval that corresponds to the unit cost used to compute it. Since 0 2829 < 3.000, (0) is realizable. There are three candidates for the optimal solution: 2.829, 3.000, and 4.000. The average annual cost functions are given by: () = + + 2 = 0,1, 2

0 () 0 < 3.000 () = {1 () 3.000 < 4.000 2 () 4.000 Substituting Q equals 2.829, 3.000, and 4.000, and using the appropriate values of , we obtain (2.829) = 0 100 2829 = (20.000)(2,5) + (20.000 ) + (0,2 2,5 ) 2829 2 = $ 51.414, 2

(3.000) = 1 100 3.000 = (20.000)(2,4) + (20.000 ) + (0,2 2,4 ) 3.000 2 = $ 49.386,6 (4.000) = 2 100 4.000 = (20.000)(2,3) + (20.000 ) + (0,2 2,3 ) 4.000 2 = $ . Hence, we conclude that the optimal solution is to place a standing order for 4.000 wafers at an average annual cost of $ 47.420. So Source C give us the best option. b. What is the optimal value of holding and setup cost for wafers when the optimal source is used? Answer: Optimal holding cost= ( 2 ) 4.000 = 0,2 ( ) 2 = $ Optimal Setup cost = = 100 20.000 4.000 = $
.

c. Determine the reorder point R, if the replenishment time is 3 months Answer: , = 4.000 = 20.000 = 0,2 = 2,4 , = 3 Lead time exceeds a cycles. So we must forming the ratio = 3 = 2,4 = , This means that there are exactly 1.25 cycles in the lead time. Every order must be placed 1.25 cycles in advance. For the purpose of computing the reorder point, this is exactly the same as placing the order 0.25 cycle in advance. In this case 0.25 cycle is 0,05 Year. So the reorder point is: = . = 20.000 0.05

= We conclude that, if the inventory stock is reaching 1000 wafers, the foundry must reorder the wafer from source C. Problem 4.26. A local outdoor vegetable stand has exactly 1000 square feet of space to display three vegetable: tomatoes, lettuce and zucchini. The appropriate data for these item are given in the following table:

Tomatoes Lettuce Zucchini Annual Demand(pound) 850 1280 630 Cost per pound $0.29 $0.45 $0.25
The setup cost for replenishment of the vegetables is $100 in each case, and space consumed by each vegetable is proportional to its cost, with tomatoes requiring 0.5 square foot per pound. The annual interest rate is 25 percent. What the optimal quantities that should be purchased of these three items? Answer: Consider the problem above, this is an area constraint not budget constraint and space consumed by each vegetable is proportional to its cost, with tomatoes requiring 0.5 square foot per pound. We can find another parameter here in table below:

Tomatoes Annual Demand(pound) 850 Cost per pound $0.29 Setup cost $100 Space consumed 0.5

Lettuce Zucchini 1280 630 $0.45 $0.25 $100 $100 0.775 0.431

If total space nor exceeded 1000 square feet then EOQ model is optimal, 2 100 850 1 = 0.25 0.29 = 1531.28 2 100 1,280 2 = 0.25 0.45 = 1508.49 2 100 630 3 = 0.25 0.25 = 1419.85 If the EOQ value for each item is used, the maximum investment in inventory would be

1531.28(0.5) + 1508.49(0.775) + 1419.85(0.431) = 2,546.61 Because the EOQ solution violates the constraint, we need to reduce the lot size. The next step is to compute the ratio

for 1 3.

The ratio turn out to be: 1 0.5 = 1 0.25 0.29 = 6.88 1 0.775 = 1 0.25 0.45 = 6.88 1 0.431 = 1 0.25 0.25 = 6.88 This result was expected because from the problem it states that space consumed by each vegetable is proportional to its cost. Because their values are pretty much same, the simple solution obtained by a proportional scaling of the EOQ will be optimal. Ratio = 1000 2546.61

= 0.3926
1 = 1531.28 0.3926 2 = 1508.49 0.3926 3 = 1419.89 0.3926

We need to verify the answer to consider it right, (601)(0.5) + (592)(0.775) + (558)(0.431) = 999.79

Problem 4.30. A company named Tomlinson Furniture produced several types of furniture using a single lathe machine using rotation policy. The relevant information concerning them appears in the following table:

Piece Monthly Requirements Setup Time (hours) Unit Cost Production Rate (Units/day) J-55R 125 1.2 20 140 H-223 140 0.8 35 220 K-18R 45 2.2 12 100 Z-344 240 3.1 45 165

Worker time for setups is valued at $ 85 per hour, holding cost based on a 20 percent annual interest charge. Assume 20 working days per month and 12 month per year. a. Determine the optimal length of the rotation cycle Answer: First we compute all the parameter in annual term, we got: Piece Annual Demand (units/year) Production Rate (units/year) Setup Time (hours) Unit Cost J-55R 1500 33600 1.2 20 H-223 1680 52800 0.8 35 K-18R 540 24000 2.2 12 Z-344 2880 39600 3.1 45 6600 150000 Then, we must verify that the problem is feasible. To do so we compute 1 to make =1

sure that demand is not exceeded the production, and the sum is equal to 0.044. Because this is less than one, there will be a feasible solution. To calculate the optimal rotation cycle T*, we need to do some intermediate calculations. i. Setup cost Worker time for setups is valued at $ 85 per hour Setup Cost ( ) = $ 85 ii. Holding cost and Modified Holding cost Holding cost ( ) = () () = 0.20 Modified holding cost ( ) = (1 ) For each item we calculate and the result in the table below: Piece Setup Costs(Kj) Holding Costs (h) Modified Holding Costs(h'j) J-55R 102 4 3.821428571 H-223 68 7 6.777272727 K-18R 187 2.4 2.346 Z-344 263.5 9 8.345454545 620.5 Now we calculate for estimate the optimal rotational cycle = =1 We get 0.0377 Year or equal to 9.048 Days b. What are the optimal lot sizes of for each product? Answer: To find the optimal lot sizes, we need to multiply the optimal cycle time by the annual demand. Using Ms. Excel we got:

h'j x Pj 128400 357840 56304 330480 873024

2 =1

Piece J-55R H-223 K-18R Z-344

Lot Sizes 56.55409517 63.34058659 20.35947426 108.5838627 248.8380188

c. What are the percentage of uptime and downtime for the lathe, assuming that it is not used for any other purpose? Answer: () Uptime, 1 = 248.838 = 150000 = 0.00165892 Downtime, 2 = 1 = 0.0377 0.00165 = 0.03604381 The Uptime and Downtime percentage for lathe is 4.4% and 95.6%.

Problem 5.8. Billys Bakery bakes fresh bagels each morning. The daily demand for bagels is a random variable with a distribution estimated from prior experience given by:

Number of Bagels sold in one day 0 5 10 15 20 25 30 35

Probability 0.05 0.1 0.1 0.2 0.25 0.15 0.1 0.05

The bagels cost Billys 8 cents to make, and they are sold for 35 cents each. Bagels unsold at the end of the day are purchased by a nearby charity soup kitchen for 3 cents each. a. Based on the given discrete distribution, how many bagels should Billys bake at the start of each day? Answer: Because Bagels cost Billys 8 cent each and Bagels unsold at the end of the day are purchased by charity soup kitchen for 3 cents each, his overage cost is

 = 8 3 = 5 His underage cost is the profit on each sale, so that = 35 8 = 27 The critical ratio is ( ) = + 0.27 = 0.05 + 0.27 = 0.843 The empirical probabilities are obtained by dividing each of the heights by 8. We obtain Number of Bagels sold in one day Probability f(Q) F(Q) F(Q) 0 0.05 1.0/8 1.0/8 0.125 5 0.1 1.0/8 2.0/8 0.25 10 0.1 1.0/8 3.0/8 0.375 15 0.2 1.0/8 4.0/8 0.5 20 0.25 1.0/8 5.0/8 0.625 25 0.15 1.0/8 6.0/8 0.75 30 0.1 1.0/8 7.0/8 0.875 35 0.05 1.0/8 8.0/8 1 The critical ratio for this problem was 0.843 which correspond to a value F(Q) between Q = 25 and Q = 30. Because we round up, the optimal solution is =30. b. If you were to approximate the discrete distribution with a normal distribution, would you expect the resulting solution to be close to the answer that you obtained in part (a)? Answer: The answer is maybe yes and maybe not. Because that this approximation is depending on data. If the spaces between sample is narrow, then two approach is pretty much same or the solution will be close, but if the spaces is to coarse then discrete and normal distribution will give different result as we see from part (a). c. Determine the optimal number of bagels to bake each day using a normal approximation. Answer: We need to calculate the mean and the variance 2 . = 1
=1

1 2 = ( )2 1
=1

From Ms. Excel we can solve the problem simultaneously as the table below

Q 0 5 10 15 20 25 30 35
With:

Probability 0.05 0.1 0.1 0.2 0.25 0.15 0.1 0.05

Quantity 0 0.5 1 3 5 3.75 3 1.75 18

Di -D -2.25 -1.75 -1.25 0.75 2.75 1.5 0.75 -0.5

(Di -D)^2 5.0625 3.0625 1.5625 0.5625 7.5625 2.25 0.5625 0.25 20.875

= 2.25 2 = 2.982 The critical ratio is + 0.27 = 0.05 + 0.27 = 0.843 From table in Appendix A-4, we get for F(Q) = 0.843, we obtain a standardized value of z = 1.01. The optimal Q is ( ) = = + = (2.982)(1.01) + (2.52) = 5.53 Notice that this result is not multiple of 5 because we use normal distribution which is assumed a continuous demand. Problem 5.13. An automotive warehouse stocks a variety of parts. One particular, oil filter is purchased for $ 1.5 each. Order cost is $ 100, inventory charge based on 28 percent annual interest rate. The monthly demand in seems to follow a normal distribution with mean 280 and standard deviation 77. Order lead time is assumed to be five months. Assume when oil filter is out of stock, then demand is back-ordered and cost $12.8 for each. a. What the optimal value of the order quantity and the reorder level? Answer: Variable cost, c = $1.50 Order cost, K = $100 Interest charge, I = 28% annually Monthly demand, Mean, = 280 Standard Deviation, = 77 Lead time, = 5 months Back order, P = $ 12.8 , = 280 12

= 3,360 2. . = 2 100 3360 = 0.28 1.5 = 1,264,91 Iteration 1 Then we calculate the value R0, . . 1,264.91 0.42 = 12.8 3360 = 0.0121 1 (0 ) = From table in Appendix A-4, we found that for 1 (0 ) = 0.0121, the correspond z = 2.25 = . + = 453.25 And from the same table, we get () = 0.0042 for z = 2.25, () = . () = 77 0.0042 = 0.323 Now we calculate the value of 1 from previous data, and we do iteration until we get better result as 2. ( + . 0 () 1 = = 1,290.76 Iteration 2 Then we substitute the value 1 = 1,290.76 into equation 1 (1 ) = replace by 1 and the equation becoming 1 (1 ) =
. .

again, with Q we

1 . . 1,290.76 0.42 = 12.8 3,360 = 0.0126 From table in Appendix A-4, we found that for 1 (1 ) = 0.0126, the correspond z = 2.24 = . + = 452.48 And from the same table, we get () = 0.0044 for z = 2.24,

() = . () = 77 0.0044 = 0.3388 Now we calculate the value of 2 from previous data, and we do iteration until we get better result as 2. ( + . 1 () 2 = = 1,292.04 Iteration 3 Then we substitute the value 2 = 1,292.04 into equation 1 (2 ) = replace by 1 and the equation becoming 1 (1 ) = = 2 . .
. .

again, with Q we

1,292.04 0.42 12.8 3,360 = 0.0126

From table in Appendix A-4, we found that for 1 (1 ) = 0.0126, the correspond z = 2.24 = . + = 452.48 Because Q2 and R2 are within one unit of Q1 and R1, we terminated the iteration. The optimal value of Q and R (Q, R) (, , ) b. What the average annual cost of holding, setup and stock out associated with this item? Answer: Holding cost: 1292 ( + ) = 0.42 ( + 452 280) 2 2 = $ 343.56 Setup cost: . 3,360 = 100 1292

= $ 260 Stock out cost: . . () 12.8 3,360 0.3388 = 1292 = $ 11.27

Total cost 343.56 + 260 + 11.27 = $ . c. Evaluate the uncertainty of this item, compare the average annual cost in part a with the average annual cost that would be incurred if the lead time demand had zero variance Answer: , = 280 12 = 3,360 2. . = 2 100 3360 = 0.28 1.5 = 1,264,91 With variance = 0, = . + = = 280 Then we calculate the value R0, . . 1,264.91 0.42 = 12.8 3360 = 0.0121 From table in Appendix A-4, we found that for 1 (0 ) = 0.0121, the correspond z = 2.25 And from the same table, we get () = 0.0042 for z = 2.25, () = 0 For 1 (0 ) = 0.0121 1 = 2 = 280 1 = 2 = 1,265 Because Q2 and R2 are within one unit of Q1 and R1, we terminated the iteration. The optimal value of Q and R (Q, R) (1,265, 280) 1 (0 ) = Holding cost: 1265 ( + ) = 0.42 ( + 280 280) 2 2 = $ 265.56 Setup cost: 3,360 = 100 1265 = $ 265.61 . Stock out cost: . . () 12.8 3,360 0 = 1292 = $ 0

Total cost 265.65 + 265.61 = 531.26 So, the cost of uncertainty from problem in part a can be found by subtracting the total value between them = 614.83 531.26 = $ .