Problem Set 1 Information and Forecasting
1. Mike McNeely, logistics manager for the Illumination Light Company, has considered replacing the firm’s manual customer order management system with electronic ordering, an EDI application. He estimates the current system, including labor, costs $2.50/order for transmission and processing when annual order volume is under 25,000. Should the order volume equal or exceed 25,000 in any given year, Mr. McNeely will have to hire an additional customer service representative to assist order reception in the manual process. This would raise the variable cost to $3.00/order. He has also estimated the rate of errors in order placement and transfer to be 12/1000 orders.
EDI would cost $100,000 upfront to implement and variable costs are determined to be $.50/order regardless of volume. EDI could acquire and maintain order information with an error rate of 3/1000 orders. An EDI specialist would be required to maintain the system at all times as well. Her salary is $38,000 in the first year and increases 3 percent each year thereafter.
Order errors cost $5.00 per occurrence on average to correct in the manual system. EDI errors cost $8.00 on average to correct since the specialist inspects the system for flaws on most occasions.
a. If the firm expects order volume over the next 5 years to be 20,000, 22,000, 25,000, 30,000, and 36,000 annually, would EDI pay for itself within the first 5 years?
b. What Effects Aside From Cost Might Mr. Mcneely Consider When Implementing Edi?
2. Mr. McNeely currently batches orders for processing under the manual order management system. The orders are batched for daily processing. If Mr. McNeely opts to implement EDI, might this affect his current means of order processing? If so, how?
3. Quality Marketing Technologies, Inc., has hired you as a sales representative. You have been asked to call on Quikee Stop, a small convenience store chain with five locations in your region. What benefits of UPC and bar coding applications might you illustrate to encourage Quikee Stop to utilize these technologies to track sales at its retail outlets?
4. Comfortwear Hosiery, Inc., produces men’s socks at its manufacturing facility in Topeka, Kansas. The socks are stored in a warehouse near the factory prior to distribution to DC locations in Los Angeles, Memphis, and Dayton. The warehouse uses a top-down forecasting approach when determining the expected quantities demanded at each DC.
The aggregate monthly forecast for June is 12,000 pairs of socks. Historically, the Los Angeles DC has demanded 25 percent of the warehouse’s stock. Memphis and Dayton have demanded 30 percent and 35 percent, respectively. The remaining 10 percent is shipped directly from the warehouse.
a. Based on the aggregate forecast, how many pairs of socks should you expect each DC to demand in June?
b. Suppose the aggregate forecast for July results in a 6 percent increase over June’s forecast. How many pairs of socks would each DC anticipate in July?
5. Ms. Kathleen Boyd, director of logistics for the Scenic Calendar Company, wishes to evaluate two methods of time series forecasting. She has collected quarterly calendar sales data from the years 2003 and 2004.
2003 / 2004Qtr. / Actual Sales / Qtr. / Actual Sales
1 / 1200 / 1 / 1300
2 / 800 / 2 / 800
3 / 200 / 3 / 250
4 / 1000 / 4 / 1200
a. Use the moving averages technique to find forecasted sales for the third quarter of 2004 based on actual sales from the previous 3 quarters.
b. Use simple exponential smoothing to forecast each quarter’s sales in 2004, given that Ms. Boyd qualitatively forecasted 900 calendars for quarter 4, 2003. Ms. Boyd has assigned an alpha factor of .1 for time series sensitivity.
c. Repeat the simple exponential smoothing problem above (part 5b) with Ms. Boyd employing an alpha factor of .2.
d. How well do the moving averages and simple exponential smoothing techniques seem to work in Ms. Boyd’s situation? In what ways do the techniques appear to fail?
6. Michael Gregory, logistics manager of Muscle Man Fitness Equipment, has determined that his current forecast system for national sales has historically shown a 20 percent error rate. Due to this level of error, Muscle Man’s DC managers maintain inventory at their locations costing the company, on average, $3,000 per month.
By improving his forecast methodology and shortening forecast horizons, Mr. Gregory anticipates cutting the error level down to 12 percent. With improved forecasting, Muscle Man’s DC managers have indicated that they feel comfortable with lower inventory levels. Mr. Gregory anticipates monthly inventory carrying cost reductions of 40 percent.
a. If the forecast system improvement will cost $1,000 more per month than the old system, should Mr. Gregory implement the change?
b. Why might Muscle Man’s customers encourage the firm to improve its forecasting capabilities?
Problem Set 2 Operations
1. Mr. Stan Busfield, distribution center manager for Hogan Kitchenwares, must determine when to resupply his stock of spatulas. The DC experiences a daily demand of 400 spatulas. The average length of the performance cycle for spatulas is 14 days. Mr. Busfield requires that 500 spatulas be retained as safety stock to deal with demand uncertainty.
a. Use simple reorder point logic to determine the order quantity for spatulas.
b. Based on your answer to part (a), find Mr. Busfield’s average inventory level of spatulas.
2. Mr. Busfield recently completed a course in logistics management and now realizes that there are significant costs associated with ordering and maintaining inventory at his distribution center. Mr. Busfield has learned that the EOQ is the replenishment logic that minimizes these costs. In an effort to find the EOQ for measuring cups, Mr. Busfield has gathered relevant data. Mr. Busfield expects to sell 44,000 measuring cups this year. Hogan acquires the measuring cups for 75 cents each from Shatter Industries. Shatter charges $8 for processing each order. In addition, Mr. Busfield estimates his company’s inventory carrying cost to be 12 percent annually.
a. Find Mr. Busfield’s EOQ for measuring cups. Assume that Mr. Busfield accepts ownership of products upon arrival at his DC.
b. Now assume Mr. Busfield must arrange for inbound transportation of the measuring cups since Hogan accepts ownership of products at the supplier’s shipping point. Quantities of fewer than 4,000 measuring cups cost 5 cents per unit to ship. Quantities of 4,000 and above cost 4 cents per unit to ship. Determine the difference in total costs associated with an EOQ of 4,000 units and the EOQ level found in part (a) when transportation costs must be considered.
c. Given the information above and the low cost EOQ alternative determined in part (b), use period-order-quantity logic to determine the number of orders Hogan would place each year for measuring cups and the time interval between orders.
3. Mr. Dave Jones manages the warehouse inventory for Athleticks, a distributor of sports watches. From his experience, Mr. Jones knows that the PR-5 jogging watch has an average daily demand of 100 units and a performance cycle of 8 days. Mr. Jones requires no buffer stock at this time.
a. Assume Mr. Jones perpetually reviews inventory levels. Find the reorder point for the PR-5 jogging watch.
b. Find the average inventory level of the PR-5 watch.
c. How might the reorder point change if Mr. Jones reviews inventory once each week? Find the reorder point under these conditions.
d. Find the average inventory level of the PR-5 watch under this periodic review.
4. Mr. John Estes oversees the distribution of Tastee Snacks products from the plant warehouse to its two distribution centers in the United States. The plant warehouse currently has 42,000 units of the company’s most popular product, Chocolate Chewies. Mr. Estes retains 7,000 units of the product at the warehouse as a buffer. The Cincinnati DC has an inventory of 12,500 units and daily requirements of 2,500 units. The Phoenix DC has an inventory of 6,000 units and daily requirements of 2000 units.
a. Determine the common days’ supply of Chocolate Chewies at each DC.
b. Given the above information and your answer to part (a), use fair share allocation logic to determine the number of Chocolate Chewies to be allocated to each DC.
5. Stay Safe International manufactures industrial safety equipment at its plant in Evansville, Indiana. The company has initiated DRP to coordinate finished goods distribution from the plant to DCs in Dallas, Texas, and Lexington, Virginia.
a. Given the accompanying information regarding hardhats, complete the DRP schedule for the warehouse and each DC.
b. Suppose that, without warning, no more than 500 units can be distributed from the warehouse to the DCs on a given week due to a manufacturing breakdown. Hardhats sell for $12 each out of the Dallas DC and $14 from Lexington. Discuss whether the warehouse should delay shipments until both DC requirements can be satisfied or allocate based on need.
6. Scorekeeper, Inc., manufactures stadium scoreboards. Table 1 illustrates the demand for Scorekeeper’s scoreboards over the past 25 days. The mean of daily demand is 6 units.
Table 1
1 / 4 / 14 / 6
2 / 3 / 15 / 4
3 / 4 / 16 / 2
4 / 6 / 17 / 5
5 / 7 / 18 / 6
6 / 8 / 19 / 7
7 / 6 / 20 / 6
8 / 5 / 21 / 6
9 / 6 / 22 / 5
10 / 10 / 23 / 7
11 / 8 / 24 / 8
12 / 7 / 25 / 9
13 / 5
a. Is the demand distribution normal? How do you know?
b. Calculate the standard deviation for daily demand. Assume in this case that the performance cycle is constant.
Table 2 summarizes Scorekeeper’s performance cycles over the past 40 replenishments. The expected cycle duration is 12 days.
Table 2
Performance Cycle / Frequency(in days) / (f)
10 / 4
11 / 8
12 / 16
13 / 8
14 / 4
c. Is the performance cycle distribution normal? How do you know?
d. Calculate the standard deviation for the performance cycle.
e. Given your answers to parts (b) and (d), find the safety stock required at 1 combined standard deviation under conditions of demand and performance cycle uncertainties.
f. If the typical order quantity is 36 units, find the average inventory at 3 standard deviations under demand and performance cycle uncertainty.
g. Scorekeeper is striving for a 99 percent product availability level. Given the above information as well as your answer to (e), find the function value of the normal loss curve, f(k).
h. Use Table 6-14 to find the value for k, given your answer to part (g), and calculate the required safety stock for the desired 99 percent availability level.
i. What would be the required safety stock for 99 percent availability should the order quantity change to 30 units?
7. The XYZ Chemical Company must ship 9,500 gallons of pesticides from its plant in Cincinnati, Ohio, to a customer in Columbia, Missouri. XYZ has a contract in place with Henderson Bulk Trucking Company as well as with the Central States Railroad. Both carriers are available for the move. Henderson will charge $600 per tank truck, and Central States’ rate is $1,000 per tankcar. Henderson tanks can hold a maximum quantity of 7,000 gallons. XYZ has a fleet of 23,500-gallon tankcars available in Cincinnati.
a. Given the above information, evaluate the cost of each alternative.
b. What other qualitative factors should be considered in this decision?
8. Shatter Industries, Inc., manufactures household and commercial glass products that serve a variety of purposes.
a. Refer to the National Motor Freight Classification 100-S (Table 8-1) to determine the LTL and TL product classifications for the following Shatter items:
i. Item 86960, glazed glass, boxed.
ii. Glass slides for microscopes.
iii. Bent mirror glass, dimensions 7 feet by 5 feet.
b. Shatter ships many of its products from a warehouse in Atlanta, Georgia, to a distribution center in Lansing, Michigan. Refer to the rate tariff in Table 8-2 to find applicable charges for the following shipments over the route:
i. 5,200 lb. of mirrored shock glass (Item 86900, Sub 1—class 85).
ii. 32,000 lb. of class 65 product.
iii. 200 lb. of class 60 product.
iv. 19,000 lb. of class 150 product.
v. 2500 lb. of class 200 product with a 5 percent temporary fuel surcharge added to the line-haul charge.
9. Gigoflop Electronics has three shipments of class 100 product to be transported from Atlanta, Georgia, to Lansing, Michigan. The shipments weigh 5,000 lb., 10,000 lb., and 7000 lb., respectively. Gigoflop can ship each quantity individually or consolidate them as a multiple-stop shipment. Each shipment is to be delivered to a different location in Lansing. The carrier, Eckgold Trucking, charges $50 for each stop-off (not including the final destination). Refer to Table 8-2 and evaluate the costs of shipping individually versus consolidation. Which option should be used by Gigoflop?
10. Stanley Harris, traffic manager of This n’ That Manufacturers, is considering the negotiation of a freight-all-kinds (FAK) rate for shipments between Atlanta and Lansing. The company ships 200 (class 65) shipments of 5000 lb., 40 (class 400) shipments of 1,200 lb., 30 (class 100) shipments of 10,000 lb., and receives a 45 percent discount on published rates.
a. Refer to Table 8-2 to determine the current freight bill for the above shipments. Note: Take the discount from the published rate and round up for the applicable hundredweight rate.
b. Should Mr. Harris accept an FAK rate of $10 per hundredweight?