THE UNIVERSITY OF HONG KONG

B.ENG. LEVEL I EXAMINATIONS

DEPARTMENT OF INDUSTRIAL AND MANUFACTURING SYSTEMS ENGINEERING

FUNDAMENTALS OF BUSINESS LOGISTICS (IMSE1016)

Answer FOUR questions only. ALL questions carry EQUAL marks.

Use of Electronic Calculators:

“Only approved calculators as announced by the Examinations Secretary can be used in this
examination. It is candidates’ responsibility to ensure that their calculator operates
satisfactorily, and candidates must record the name and type of the calculator used on the
front page of the examination script.”

Question 1

(a) What are the typical costs relevant to inventory management? Discuss the
disadvantages of carrying inventories. [9 marks]

(b) Best Burger sells burgers 365 days a year. Best Burger orders cartons of frozen burger
patties from a supplier at a price of $2,750 per carton. In addition, the supplier
charges $200 to make a delivery to Best Burger, regardless of number of cartons
delivered. Best Burger has estimated that the daily demand for the frozen burger
patties is 5 cartons and its annual holding cost rate is 30%.

(i) Use Economic Order Quantity model to determine the number of cartons Best
Burger should order from the supplier each time and how often it should
order. Sketch the total inventory cost against the order quantity. [10 marks]

(ii) Suppose that in view of tight cash flow in Best Burger’s operations, the top
management has decided to limit the maximum amount of capital tied up in
the inventory of the frozen burger patties. Determine the best order quantity
for the case that the maximum is $95,000 and the case that the maximum is
$55,000.
[6 marks]

Question 2
(a) Discuss the significance of logistics to a manufacturing company. [6 marks]

(b) What are the three typical levels of logistics planning? For a major decision area like
transportation, discuss the major decisions to be made for the three levels of planning.
When should the planning of logistics network be carried out? [12 marks]

(c) Discuss the major elements of customer service in transaction stage. [7 marks]

(IMSE1016 – page 1 of 3)
Question 3
(a) Discuss, with appropriate diagrams, the effect of transportation service and average
inventory level on logistics costs for a product with a high degree of substitutability.
[6 marks]

(b) A convenience chain is in the process of determining the optimal customer service
level, measured in terms of in-stock probability at stores, for its best-selling item. The
item costs $50 per unit and its trading margin is $5 per unit. The annual sales of the
item are 100,000 units. The demand during replenishment lead time is assumed to be
normally distributed with a standard deviation of 50,000 units. Annual inventory
holding cost rate is 30 percent. It is estimated that for every 1 percent change in the
in-stock probability, total sales volume will change by 100y percent. The z-values for
various in-stock probabilities are given below.

In-stock 90 91 92 93 94 95 96 97 98 99
probability
z-value 1.28 1.34 1.41 1.48 1.55 1.65 1.75 1.88 2.05 2.33

(i) Find the optimum customer service level for y = 0.1 and y = 0.2. [8 marks]
(ii) Suppose that the convenience chain has set the customer service level at 95%.
Find the value of y such that the service level set is the optimal one. [5 marks]
(iii) Discuss the four common methods for estimating y. [6 marks]

Question 4
(a) Discuss the major factors affecting order processing time. [8 marks]

(b) The manager at a logistics company is planning to schedule a fleet of trucks with
capacity 10 tons each to deliver items to 5 customers from the distribution centre
(DC) of the company. The travelling time in minutes between each pair of locations is
given in the following table.

DC Customer Customer Customer Customer Customer

1 2 3 4 5
DC 0 40 140 60 20 60
Customer 1 40 0 70 100 40 30
Customer 2 140 70 0 30 120 80
Customer 3 60 100 30 0 80 40
Customer 4 20 40 120 80 0 50
Customer 5 60 30 80 40 50 0

The weights of the items to be delivered to Customers 1 to 5 are 4, 3, 2, 3, and 4 tons,

respectively.

i) Find the set of customers to be served by each delivery truck using Clark-
Wright method. [11 marks]

(IMSE1016 – page 2 of 3)
 ii) Assuming that the items to be delivered to Customers 2 and 5 cannot be
loaded into the same truck. Find the set of customers to be served by each
delivery truck using Clark-Wright method. [6 marks]

Question 5
A manufacturing company, currently using rail to ship one of its products between its
production plant and its customer’s warehouse, wants to find a more cost-effective
transportation mode. Annual demand for the products is 100,000 units, the annual holding
cost rate is 30%, and the production cost of each unit is $50. Relevant data on the
transportation modes under the company’s consideration are given in the following table:

Mode Transportation rate Transit time (days) Number of

($/unit) shipments/year
Rail 2.0 20 10
Truck 2.5 10 20
Air 40.0 2 50

(a) Which mode should the company choose in order to minimize the sum of
transportation and inventory costs? [10 marks]

(b) Suppose that, after having carried out an analysis similar to part (a), the company
decides to negotiate with the current transportation service provider to get a better rate
before making the decision to switch to the most cost-effective transportation mode.
The transportation service provider has made the following two proposals in response
to the company’s request for cutting rate:

Proposal Transportation rate Transit time (days) Minimum shipment

($/unit) sizes (units)
1 1.8 15 10,000
2 1.5 20 40,000

(i) Which proposal is better? [8 marks]

(ii) What are the maximum transportation rates that the service provider should
quote so as to make the two proposals attractive to the company? [7 marks]

 End of Paper 

(IMSE1016 – page 3 of 3)
Suggested Solutions

Question 1

(b) (i)
2* 200*365*5
Optimal order quantity = = 29.74 = 30 cartons
2750*0.3
Optimal time between successive orders = 30/5 = 6 days

(b) (ii)
Case 1 the maximum = $95,000
Value of capital tied up for order quantity of 30= 2750*30 = $82,500 < the maximum.
Therefore, the best order quantity = 30 cartons.

Case 2 the maximum = $55,000

The maximum inventory level = 55000/2750 = 20 cartons. Therefore, the best order quantity
is 20 cartons.

(IMSE1016 – page 4 of 3)
Question 3.
(b)(i)
The optimum service level is set at that point where the change in gross profit equals
the change in cost.
The change in gross profit:
∆P = Trading margin Sales response rate Annual sales
= 5y0,000
= $500000y per year per 1 percent change in the service level
The change in cost:
∆C = Annual carrying rate Standard product cost ∆zDemand standard deviation
= 0.35050000∆z
= 750000∆z
Set ∆P = ∆C
500000y = 750000∆z
∆z = 0.67y
For y = 0.1, ∆z = 0.067, , the service level should be set 92 percent.
For y = 0.2, ∆z = 0.134, the service level should be set between 96-97 percent.

(ii)
∆z = 0.1. Hence,
500000y = 750000∆z = 75000
y = 0.15.

(IMSE1016 – page 5 of 3)
Question 4
(b) (i)
S12 = 110 S13 = 0 S14 = 20 S15 = 70
S23 = 170 S24 = 40 S25 = 120 S34 = 0
S35 = 80 S45 = 30

Arrange the savings in decreasing order:

S23, S25, S12, S35, S15, S24, S45, S14, S13, S34

Truck 1
The set of customers: 2, 3 and 5
weight of items carried = 9 tons

Truck 2
The set of customers: 1 and 4
weight of items carried = 7 tons

(ii)
Truck 1
The set of customers: 2, 3 and 1
weight of items carried = 9 tons

Truck 2
The set of customers: 4 and 5
weight of items carried = 7 tons

(IMSE1016 – page 6 of 3)
Question 5
(a)
Cost Rail Truck Air
Transportation R*D =2.0*100000 = 2.5*100000 = 40.0*100000
= 200,000 = 250,000 = 4,000,000

In-transit I*C*D*t/365 =0.3*50*100000*20/365 =0.3*50*100000*10/365 =0.3*50*100000*2/365

inventory = 82,192 = 41,096 = 8,219
Plant I*C*Q/2 = 0.3*50*10000/2 = 0.3*50*5000/2 = 0.3*50*2000/2
inventory = 75,000 = 37,500 = 15,000
Total 357,192 328,596 4,022,219

Therefore, the company should use truck.

(b)
Cost Proposal 1 Proposal 2
Transportation R*D =1.8*100000 =1.5*100000
= 180,000 = 150,000

In-transit inventory I*C*D*t/365 =0.3*50*100000*15/365 =0.3*50*100000*20/365

= 61,644 = 82,192
Plant inventory I*C*Q/2 = 0.3*50*10000/2 = 0.3*50*40000/2
= 75,000 = 300,000
Total 316,644 532,192

Proposal 1 is the better one.

(c)
Proposal 1,
100000p + 61644 + 75000 = 328596,
p =$1.92/unit
The maximum rate is $1.92/unit.

As for proposal 2, there does not exist any rate that can make it attractive.

(IMSE1016 – page 7 of 3)