Operations and Production Management MGMT 405 Problem Set 5

Operations and Production Management MGMT 405 Problem set 5

MGMT 405 Operations and Production Management

Problem set 5

(Reference chapters 12– William J. Stevenson-2007, ninth edition)

Discussion Questions

1. What are the primary reasons for holding inventory?

2. What are the requirements for effective inventory management?

3. Briefly describe each of the costs associated with inventory.

4. What potential benefits and risks do RDIF tags have for inventory management?

5. How would you respond to the criticism that EOQ models tend to provide misleading results because values of D, S and H are at the best educated guesses?

6. Under what circumstances would the amount of safety stock held be

a) Large? b) Small? c) Zero?

7. Describe briefly the ABC approach to inventory control.

8. What is the single period model and under what circumstances is it appropriate?

9. What are some ways in which a company can reduce the need for inventories?

Problems

1. The manager of an automobile repair shop hopes to achieve a better allocation of inventory control efforts by adopting an ABC approach to inventory control. Using the following monthly usage and classify the items in A, B, and C categories according to dollar usage:

Item / Usage / Unit Cost
4021 / 50 / $ 1400
9402 / 300 / 12
4066 / 40 / 700
6500 / 150 / 20
9280 / 10 / 1020
4050 / 80 / 140
6850 / 2000 / 15
3110 / 400 / 20
4400 / 7000 / 5

(a) Calculate monthly dollar value in each raw.

(b) Use the concept of ABC classification and array from highest to lowest.

(d) Briefly explain the abovementioned scenario.

(e) How could the manager use the information formed in the above Table.

(f) After reviewing your classification scheme, suppose that the manager decides to place 4400 into the A category. What may be some possible explanations for this decision?

2. A bakery buys flour in 25 pound bag. The bakery uses an average an average of 4860 bags a year. Preparing an order and receving a shipment of flour involves a cost of $ 10 per order. Annual carring cost is $ 75 per bag.

(a) Determine the EOQ?

(b) What is the average number of bags on hand?

(d) Compute the total cost of ordering and carring flour.

(e) How much would that affect the minimum total annual cost if the ordering costs were to increase by $ 1 per order?

3. A manufacturer produce x drug in 100-pound bags. Demand for this product is 20 tons per day. The capacity for producing the product is 50 tons per day. Setup costs $ 100, storage and handling costs are $ 5 per ton a year. The firm operates 200 days per year and 1 ton is equal to 2000 pounds.

(a) How many bags per run areOptimal (i.e. run size)?

(b) What would the average inventory be for this lot size?

(d) About how many runs per year would there be Run time?

(e) How much could the company save annually if the setup cost could be reduced to $25 per run ?

4. A manufacturer of exercise equipment purchases the pulley section of the equipment from supplier who lists these prices: less than 1000, $5 each; 1000 to 3,999, $ 4.95 each; 4000 to 5999, $ 4.90 each; and 6000 and more $ 4.85. Ordering costs are $ 50, annual carring costs per unit are 40 percent of purchase cost, and annual usage is 4900 pulleys. Determine

(a) the common EOQ (the common minimum point)

(b) the total cost if the feasible minimum point is on the lowest price range, that is the optimal order quantity.

5. A newspaper publisher uses roughly 800 feet of baling wire each day to secure bundles of newspapers while they are being distributed to carriers. The paper is published Monday through Saturday. Lead time is six working days. The company desires a service level of 95% when stock-out risk for various levels of safety stocks are as follows: 1500 feet, 0.10; 1800 feet, 0.05; 2100 feet, 0.02; and 2400 feet, 0.01?

(a) What value of Z is appropriate?

(b) Find the standard deviation of lead time?

6. A manager of a construction supply house determined from historical records that demand for sand during lead time averages 300 units. In addition, the manager determined that demand during lead time could be described by a normal distribution that has a mean of 300 units and a standard deviation of 30 units.

(a) Determine the appropriate Z-value whilst risk of stockout 1 percent?

(b) Determine ROP when the risk of stockout is 1 percent during lead time?

(d) Would a stockout risk of 2 percent require more or less safety stock compared to a one percent risk?

7. A computer store sells an item which is supplied by a vendor who handles only that item. Demand for this item recently changed. The manager wants a probability of at least 96 percent of not having a stockout during lead time. The manager expects demand to average a dozen units a day and have a standard deviation of 2 units a day. Lead time is variable averaging four days with standard deviation of one day. Assume normality and seasonality is not a factor.

(a) Find the appropriate Z value.

(b) What is ROP?

8. Demand for jelly doughnuts on Saturdays at Don’s Doughnut Shoppe is shown in the following table. If labor, materials, and overhead are estimated to be $ 3.20 per dozen, doughnuts are sold for $ 4.80 per dozen, and left over doughnuts at the end of each day are sold the next day at half price,

(a) Determine the shortage and excess costs

(b) Determine the service level

(d) list the cumulative tables for demand

(e) Compute the optimal number of doughnuts?

Demand (Dozen) / Relative.Freq.
19 / 0.01
20 / 0.05
21 / 0.12
22 / 0.18
23 / 0.13
24 / 0.14
25 / 0.10
26 / 0.11
27 / 0.10
28 / 0.04
29 / 0.02