THE UNIVERSITY OF HONG KONG

B.(Eng.) EXAMINATIONS

DEPARTMENT OF INDUSTRIAL AND MANUFACTURING SYSTEMS ENGINEERING

(IMSE2116) FUNDAMENTALS OF BUSINESS LOGISTICS

May 26, 2015 9:30 am – 12:30 pm

Answer FOUR questions. ALL questions carry EQUAL marks.

Use of 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.”

(IMSE2116 – page 1 of 4)
Question 1

(a) Never Sleep (NS) is a chain of 300 convenience stores. NS is planning to enter the
market in South China. NS logistics manager has proposed to set up 3 privately owned
warehouses to supply the new stores in South China to minimize the transportation cost
from the warehouses to the stores. The logistics manager has also planned to operate a
fleet of privately owned trucks to make deliveries to the stores.

i) For managing the transportation of NS distribution network, there are three levels
of planning, namely, strategic, tactical and operational. What are the major
differences between them? What are the major strategic, tactical and operational
decisions?
(7 marks)

ii) Discuss whether the NS logistics manager has applied the total cost concept to
the problem of determining the optimal number of warehouses in NS distribution
network. (5 marks)

iii) Is the NS logistics manager’s strategy possibly a violation of the principle of

mixed strategy? Discuss. (5 marks)

(b) Sketch a generalized curve for the product life cycle and discuss the impact of product
life cycle on a company’s distribution strategy. (8 marks)

Question 2

(a) City Gold, a leading retail chain selling gold jewellery 365 days a year, has just built a
new gold vault in Hong Kong to store gold purchased from overseas suppliers. The
company has estimated that its average weekly demand for gold is 10 kg., the lead time
for gold delivery from overseas suppliers is 3 days, the cost of transporting gold from
overseas suppliers is $30,000 each occasion, the gold market price is $300,000/kg, and
the annual carrying rate is 15% per year.

i) Use the Economic Order Quantity model to determine the amount of gold City
Gold should purchase from overseas suppliers each time, the reorder point and
how often it should purchase. (12 marks)

ii) Suppose that the estimation made by City Gold’s accountant is inaccurate and the
annual carrying cost rate is 20% rather than 15%. Determine the increase in
annual total inventory cost due to the accountant’s inaccurate estimation.
(7 marks)

(b) Why do companies often give a discount to customers who purchase much larger
quantities than the usual? Use a simple graph to illustrate the impacts on per unit
logistics costs as a justification for the discount. (6 marks)

(IMSE2116 – page 2 of 4)
Question 3

(a) Products are normally classified into 4 types - convenience, shopping, specialty and
industrial. Discuss the common purchasing behavior of the customers and the typical
characteristics of the distribution systems for the four product types. (8 marks)

(b) What are the three major modules of a logistics information system? Discuss the major
functions of each module. (9 marks)

(c) Order cycle time is an important performance measure of a logistics system. Discuss the
major components of a customer order cycle and the typical customer service policies
that affect the order cycle time. (8 marks)

Question 4

(a) Discuss the common performance measures for service and suggest an appropriate
performance measure for transportation. (7 marks)

(b) The logistics analyst of a supermarket chain is planning to schedule a fleet of trucks with
capacity 20 tons each to deliver items to 5 stores from the distribution centre (DC) of the
supermarket chain. The travelling distance in kilometres between each pair of locations
is given in the following table.

Store 1 Store 2 Store 3 Store 4 Store 5

DC 34 30 22 7 22
Store 1 10 11 27 21
Store 2 11 25 25
Store 3 16 14
Store 4 16

The weights of the items to be delivered to Stores 1 to 5 are 8, 6, 4, 6, and 8 tons,

respectively.

i) Find the set of stores to be served by each delivery truck using Clark-Wright
method. (12 marks)

ii) Assuming that each vehicle is constrained to travel no more than 70 kilometres.
Find the set of customers to be served by each delivery truck using Clark-Wright
method. (6 marks)

(IMSE2116 – page 3 of 4)
Question 5

(a) A shipping line wishes to ship a container from port A to port G through the shipping
network shown in the following diagram. If the shipment reaches port G later than 10
days, the shipping line has to pay a penalty of $1,000 for each day late.

B
7
2 2 G
5
5 4
A C E
7
4 1 3 1

4
D F

The figures given in the above diagram are estimated travelling times between ports in
days. Determine the shortest route from city A to city G and the amount of penalty.
(11 marks)

(b) A computer manufacturer has three transportation service choices for delivery - rail,
truck and water. The manufacturer has collected the following information about the
three choices.

Transport Transportation rate Transit time (days) Shipment size (units)

Mode ($/unit)
Rail 3.0 25 20,000
Truck 4.5 7 5,000
Air 60.0 2 800

Annual demand for the manufacturer’s products is 200,000 units, the annual holding cost
rate is 20%, and the production cost of each unit is $100.

i) Which mode of transport should the manufacturer select? (9 marks)

ii) Suppose that a transportation service provider has proposed an inter-modal

service with transit time of 10 days and shipment size of 8,000 units. What is the
maximum transportation rate that the service provider should quote so as to make
its service attractive to the manufacturer? (5 marks)

 End Of Paper 

(IMSE2116 – page 4 of 4)
 THE UNIVERSITY OF HONG KONG
B.(Eng.) May 2015 EXAMINATIONS
Suggested Solutions

DEPARTMENT OF INDUSTRIAL AND MANUFACTURING SYSTEMS ENGINEERING

(IMSE2116) FUNDAMENTALS OF BUSINESS LOGISTICS

Question 2

(a) i) K = $30000/order
H = $0.15*300000/kg/year
D = 10*52
EOQ = (2KD/H) = 26.3kg
Reorder point = 3/7*10 = 4.29 kg
Time between successive purchases = 52/(52*10/26.3) = 2.63 weeks
(12 marks)

ii) Annual total inventory cost for purchase quantity of 26.3 kg = 10*52/26.3*30000 +
0.2*300000*26.3/2 = $1,382,156
For H = $0.25*300000/kg/year, EOQ = 22.8 kg
Annual total inventory cost for purchase quantity of 22.8 kg = 10*52/22.8*30000 +
0.2*300000*22.8/2 = $1,368,211.
Therefore, the increase in annual total inventory cost = $13,946.
(7 marks)

(IMSE2116 – page 5 of 4)
Question 4

(b) i) S12 = 54 S13 = 45 S14 = 14 S15 = 35

S23 = 41 S24 = 12 S25 = 27 S34 = 13
S35 = 30 S45 = 13

Arrange the savings in decreasing order:

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

Truck 1
The set of stores: 1, 2 and 3
weight of items carried = 18 tons

Truck 2
The set of stores: 4 and 5
weight of items carried = 14 tons
(12 marks)

ii) Truck 1
The set of customers: 1, 3 and 4
distance travelled = 68 km

Truck 2
The set of customers: 2
distance travelled = 60 km

Truck 3
The set of customers: 5
distance travelled = 44 km

(6 marks)

(IMSE2116 – page 6 of 4)
Question 5

(a)

B
7 13
2 2 8 G
4 5
5 4
A C E
7
4 1 3 1
4
4 7
D F

The optimal path is A-B-C-F-E-G or A-B-C-E-G. The minimum voyage time is 13 days
and hence, the penalty is 3*1000 = $3,000. (11 marks)

(b) i)

Cost Rail Truck Air

Transportation R*D =3.0*200000 = 4.5*200000 = 60.0*200000
= 600,000 = 900,000 = 12,000,000

In-transit I*C*D*t/365 =0.2*100*200000*25/365 =0.2*100*200000*7/365 =0.2*100*200000*2/365

inventory = 273,973 = 76,712 = 21,918
Plant inventory I*C*Q/2 = 0.2*100*20000/2 = 0.2*100*5000/2 = 0.2*100*800/2
= 200,000 = 50,000 = 8,000
Warehouse I*C’*Q/2 = 0.2*103*20000/2 = 0.2*104.5*5000/2 = 0.2*160*800/2
inventory = 206,000 = 52,250 = 12,800
Total 1,279,973 1,078,962 12,042,718

Therefore, the company should use truck. (9 marks)

(b) ii) Total cost of hiring transportation service provider =

p*200000+0.2*100*200000*10/365 + 0.2*100*8000/2 + (100+p)*0.2*8000/2=
200800p + 269589 <= 1078962. Therefore, the maximum rate is $4.03/unit.
(5 marks)

 End 

(IMSE2116 – page 7 of 4)