SCM 300 Module 02

Study Guide & Problem Set

Module 02: Buy It: Inventory, Purchasing, Supply Management

Reading Assignment - e-Notes (Supply Chain Management Fundamentals: Module 2)
Below is a list of the items most likely to be tested from the Module 2 eNotes:

Inventory
Lead time
Lot Size
Inventory
Demand Forecasting
SKU
Independent vs Dependent Demand
All 8 Inventory Classifications

Making vs Buying
TCO
Vertical Integration
Forward and Backward Integration
Steps in purchasing process
MR, RFQ, PO
E-procurement system
Centralized vs Decentralized purchasing

High vs. Low Inventory

All 4 Costs of Inventory
Inventory Calculations
TC Formula
EOQ

Supplier base
Choosing a supplier
Supplier scorecards
Supplier certifications
Single vs. Multiple suppliers
Also, be sure to read all introductory sections: Stuff, Car, etc.

Reading Assignment - CASE: Building Deep Supplier Relationships

Link: hbr.org/2004/12/building-deep-supplier-relationships#
Below is a list of the items most likely to be tested from this case:
1.

How do American suppliers feel about Japanese and American car

manufacturers?
2. What is kieretsu?
3. What did American companies do to copy the Japanese partnering model?
Despite the efforts of American car manufacturers, why did cost resurface as the
key criterion?
4. How long does it take American and Japanese automakers to design a new car?
Why are the Japanese faster?
5. Japanese cars are seen as durable, reliable and high in quality. Do they struggle
in decreasing manufacturing costs?
6. What are the general steps outlined in the supplier-partnering hierarchy? How
should companies go about fulfilling each step?
7. How did the relationship between Honda and Atlantic Tool and Die develop?
8. How has Johnson Controls benefited from its relationship with Toyota?
9. How does Honda use report cards?
10. Despite the low cost wage opportunities presented by Chinese and Indian
suppliers Toyota and Honda have not switched suppliers. Why?
11. Why does Toyota divide components into two categories?

SCM 300 Module 02

Study Guide & Problem Set

12. Explain the benefits of Hondas Best Practices program to both Honda Suppliers
and Honda.

SCM 300 Module 02

Study Guide & Problem Set

Below is a list of the items most likely to be tested from the lectures. This list is
not necessarily complete, but it is a helpful guide.
Introduction to Inventory
Lead time
Lot size
SKU
Shrinkage
Inventory and types of inventory
Relationship between risk and inventory
Purchasing considerations
Costs associated with inventory
Inventory Classifications - long-term, seasonal, safety stock, market, pipeline, anticipation
Basic Forecasting Models
Qualitative and Quantitative forecasting
On your own material: Simple moving average and Weighted moving average
Total Cost of Inventory and EOQ
High vs Low inventory Benefits, downsides, tradeoffs
Cycle stock
Costs of inventory
Be able to discuss, explain, and use the Total Cost Formula. Formulas, calculations, graphs, etc.
The lab exercise and problems are good indications of what the exam might contain.
Total cost formula Know all parts of the formula.
On your own material: Time between orders
EOQ - Fully understand this concept, calculations and all associated the graphs.
o What does it mean if AHC > AOC? AHC < AOC?
o How do you know if you are above or below the EOQ?
Procurement Basics
Purchasing process
Make or Buy decision
Centralized and Decentralized purchasing
Key issues to consider in choosing a supplier
Supplier scorecards, Supplier certification
Importance of relationship management between buyers and suppliers
Vertical integration, Forward and backward integration

Be aware that the primary examples given in the lecture and charts or
illustrations used in class may also be tested.

SCM 300 Module 02

Study Guide & Problem Set

Problem #1 (Done in Lecture)

Annual Demand (D)

8000

Ave Weekly Demand

153.85

D/52

Ave Daily Demand (d)

21.92

D/365

Unit Cost ( C )

$16.00

Ordering Cost (S)

$40.00

Holding Cost ( % of C )

25.00%

Holding Cost (H)

$4.00

C * 0.25

(Q/D) 52

(D/Q) S

Annual Cost of Item

(DC)
Q

D/Q

Q/2

AOC
Lot Size
Orders/Yr
(Order Size)

Time
Between
Orders
(weeks)

Order Cost

(Q/2) H
AHC

TC

Average
Inventory

Carrying
Cost

Total Cost

100

80.0

0.65

50

$200.00

$131,400.00

200

40.0

1.3

100

$400.00

$130,000.00

300

26.7

1.95

150

$600.00

400

20.0

2.6

200

$800.00

500

16.0

3.25

250

$1,000.00

600

13.3

3.9

300

$1,200.00

700

11.4

4.55

350

$1,400.00

$129,857.14

800

10.0

5.2

400

$1,600.00

$130,000.00

SCM 300 Module 02

Study Guide & Problem Set
GRAPH for Problem #1

1800

1600

1400

1200

1000

800

600

400

200

100

200

300

400

500

600

700

800

900

SCM 300 Module 02

Study Guide & Problem Set

Problem #2 (Done in Lecture)

Givens: Annual Demand = 15,000 Units
Holding Cost = 0.30 or 30% of unit cost per unit per year
Unit Cost = $10.00
Cost to Place an Order = $125.00
a. Find EOQ

b. TC if Q=EOQ

c. TBO if Q=EOQ

a. Find EOQ
EOQ =

2SD
H

b. TC if Q=EOQ
TC =
TC =
TC =

2 ($125) 15,000
$3.00

DC
+
Item Cost +
15,000 (10) +
+

(Q/2) H
AHC
(1118/2) 3

TC =

150,000

TC =

________________

+
+
+

____________

(D/Q) S
AOC
(15,000/1118) 125
+

____________

COST
Annual Holding Cost

Total Cost

Annual Ordering Cost

1118

1118.03

QUANTITY (Q)

NOTE: When Q is greater than EOQ, AHC > AOC. You are holding too much.
When Q is less than EOQ, AHC < AOC. You need to hold more inventory.
c. TBO if Q=EOQ
T.B.O. = [ ( Q / D) 52] Weeks
T.B.O. = ____________

= [ ( 1118 / 15,000) 52] Weeks

= ______ weeks and _____ days

SCM 300 Module 02

Study Guide & Problem Set
PROBLEM #3
A certain store sells Sun Devil Baseball Caps (Style 101). They sell, on average, 90 of those
caps per week during their 52 week fiscal year. The Unit cost for a cap is $11.70. All ordering
costs, transportation, tracking, processing, stocking, etc. amounts to $54 per order. Annual
holding costs are 27% of the unit cost.
A. Currently the lot-size this store uses is 1500. What is their AHC? What is their
AOC? What is their TC? Without calculating EOQ, is their present lot-size
smaller or larger than the EOQ?
A. Which order size will provide the lowest Total annual inventory cost?
B. Using EOQ, what would the avg. time between orders be?
C. How much do they stand to save annually in Total annual inventory costs if
they use EOQ versus the present lot-size of 1500?

GOOD PRACTICE PROBLEM FOR THE EXAM

PROBLEM #4
An electronics firm has annual demand of 1,440 units, holding costs are 12.50% of the
cost of the item per unit, per year, and ordering cost are $50. Each unit costs $80 to
produce. Their present lot size is 650 units.
A How many orders will they place if they use the present lot size?
B What is the average inventory if they use the present lot size?
C What is the Annual Holding Cost if they use the present lot size?
D What is the Annual Ordering Cost if they use the present lot size?
E What is the Total Annual Inventory Cost (include DC) if they use the present lot size?
F

What is the Time Between Orders in weeks if they use the present lot size?

G Which lot size will give them the lowest annual inventory cost?
H How many orders will they place if they use the EOQ?
I

What is the average inventory if they use the EOQ?

J What is the Annual Holding Cost if they use EOQ?

K What is the Annual Ordering Cost if they use EOQ?
L

What is the Total Annual Inventory Cost (include DC) if they use EOQ?

M What is the Time Between Orders in weeks if they the EOQ?

N How much do they stand to save if they use their EOQ versus their present lot size?

SCM 300 Module 02

Study Guide & Problem Set
Use the following Data Set to complete the problems that follow. Try using both a
calculator and a spreadsheet to solve these problems:

Period
1
2
3
4
5
6
7
8
9
10
11
12

Sales Volume
25,502
24,946
25,911
26,245
26,454
26,269
26,452
26,804
25,396
26,256
31,365
28,226

5. What are the 4 period moving average forecasts for periods 5 through 12?
6. What are the 3 period moving average forecasts for periods 5 through 12?
7. What would be the forecast for periods 5 through 12 using a 4 period weighted moving
average? The weights for each period are 0.1, 0.2, 0.3, and 0.4 from the oldest period to the
most recent period, respectively.
8. What would be the forecast for periods 5 through 12 using a 3 period weighted moving
average? The weights for each period are 0.1, 0.3, and 0.6 from the oldest period to the most
recent period, respectively.
Use the following Data Set to complete the problems that follow. Try using both a
calculator and a spreadsheet to solve these problems:

Period
1
2
3
4
5
6
7
8
9

Sales Volume
37,792
39,562
41,330
42,141
42,455
42,032
41,538
41,605
41,727

SCM 300 Module 02

Study Guide & Problem Set

10
11
12

42,899
42,677
43,459

9. What are the 4 period moving average forecasts for periods 5 through 12?
10. What are the 3 period moving average forecasts for periods 5 through 12?
11. What would be the forecast for periods 5 through 12 using a 4 period weighted moving
average? The weights for each period are 0.1, 0.2, 0.3, and 0.4 from the oldest period to
the most recent period, respectively.
12. What would be the forecast for periods 5 through 12 using a 3 period weighted moving
average? The weights for each period are 0.1, 0.3, and 0.6 from the oldest period to the
most recent period, respectively.

Problem Set KEY

1.
2.
3.

This problem will be done during lecture.

This problem will be done during lecture.
Part A. AHC = $2,369.25, AOC = $168.48, TC = $57,293.73
Part B. EOQ = 400
Part C. TBO = 4.44 weeks
Part D. AHC=AOC = $631.80, TC = $56,019.60, Savings = $1,274.13

4.
A. 2.215 orders
B. 325 units
C. $3250
D. $110.77

E. $118,560.77
F. 23.47 Wks
G. 120 units
H. 12 orders
I. 60 units

Problems 5 through 8
Forecast
for Period:
5
6
7
8
9
10
11
12

Problem 4 Problem 5 Problem 6 Problem 7

25,651.00
25,889.00
26,219.75
26,355.00
26,494.75
26,230.25
26,227.00
27,455.25

25,700.67
26,203.33
26,322.67
26,391.67
26,508.33
26,217.33
26,152.00
27,672.33

25,810.70
26,131.90
26,283.90
26,376.80
26,556.40
26,116.90
26,127.20
28,182.40

26,014.90
26,337.00
26,322.10
26,397.30
26,644.90
25,924.00
26,052.80
29,235.40

Problems 9 through 12
Forecast
for
Problem 8 Problem 9 Problem 10
Period:
5
40,206.25 41,011.00 40,947.00
6
41,372.00 41,975.33 41,846.50
7
41,989.50 42,209.33 42,110.50
8
42,041.50 42,008.33 41,929.90
9
41,907.50 41,725.00 41,755.30
10
41,725.50 41,623.33 41,683.10

Problem 11
41,639.80
42,248.30
42,169.80
41,777.90
41,627.60
41,671.50

J. $600
K. $600
L. $116,400
M. 4.33 Weeks
N. $2,160.77

SCM 300 Module 02

Study Guide & Problem Set

11
12

41,942.25
42,227.00

42,077.00
42,434.33

42,152.50
42,446.40

42,418.00
42,648.60