Discussion Questions

1. Describe the reasons why an organization would keep inventory

2. What are the different types of inventory, and what are the uses of these types?

3. Describe the perpetual and the periodic inventory systems. How are they differ-ent? Are there circumstances in which one system better than the other?

4. How does the ABC classification system work, and how does it help to control costs?

5. The economic order model is based on the trade-off between holding and order-ing costs. Describe these two different types of costs and how each depends on order size.

6. How do quantity discounts impact the decision about amounts ordered?

7. What is safety stock, and what is the basis for determining the amount of inven-tory to hold as safety stock?

Problems

1. Fast-Mart is a discount retailer that uses a POS system to maintain continuous inventory records. A particular item has an average annual demand of 40,000 units. It costs $25 to replenish inventory of that item, which has a value of $10 per unit. If the inventory carrying cost is 20% of the unit value, how many units should be ordered each time to minimize total annual variable costs?

2. Suppose Fast-Mart has found that the item described in Problem 1 has a lead time of two working days. If the company operates 250 days per year, determine the order point for that item.

3. The Fill-er-Up gas station has found that demand for its unleaded gasoline is fairly constant and uniform at the rate of 100,000 gallons per year. Fill-er-Up must pay $100 for shipping per order of gasoline, which it currently buys for $3.75/gallon. Inventory carrying cost is 10% of unit cost per year. How many gal¬lons should be ordered at a time?

4. Suppose that in Problem 3, Fill-er-Up's underground storage tanks can hold only 10,000 gallons of unleaded gasoline. What is the extra cost incurred by ordering this quantity each time instead of the EOQ?

5. The Slick Oil Company buys crude oil from a supplier that has recently offered the following quantity discounts:

If inventory holding cost is 25% of the unit price and it costs $100 for each order, regardless of order size, how many barrels should Slick order each time to satisfy its annual demand of 10,000 barrels?

6. Burger-Farm is a fast-food restaurant that buys hamburger buns from a local bak-ery. Those buns are used at the rate of 50,000 per year. The baker has just offered Burger-Farm the following quantity discounts:

If it costs Burger-Farm $1 for each order placed and the inventory holding cost is 25% of the unit cost, determine how much should be ordered each time to mini-mize total annual variable costs.

7. Referring to Problem 6, suppose Burger-Farm is limited to ordering only one week's worth of buns at a time due to storage space limitations and spoilage problems. What impact will this have on total annual variable cost?

8. The Young Professionelle Shoppe is a boutique for professional women. A peri-odic system is used to control inventory. Suppose that a certain blazer has an average annual demand of 1,000 units. The ordering cost is $5, and the inventory carrying cost is $10 per unit per year. What should the review interval be for this blazer?

9. Suppose that the Young Professionelle Shoppe in Problem 8 prefers to review its inventory weekly. Estimate the effect on total annual variable costs of following this procedure.

10. A discount retail store uses a periodic inventory system through which each item's inventory level is reviewed twice monthly. Suppose it has been deter-mined that a particular item has an average annual demand of 6,000 units, with a standard deviation of 100 units per month. If lead time is one-half month and the store wants a service level of 85%, determine the order-up-to level for this item.

11. The Goodstone Tire Store has been using a periodic review system to control its inventory. For one tire model, the annual demand averages 5,000 units. In the past, inventory was reviewed so that the review interval plus lead time was one month. The standard deviation of demand during this period was 50 units. The company is now planning to use a continuous review system. Suppose lead time is one week and the standard deviation of demand during lead time is 10 units. Compare the safety stock necessary under periodic review with what would be necessary for continuous review at a 90% service level.

12. An inventory clerk at the Fargo Machine Tool Company has just calculated the EOQ for one of the steel alloys used by this company as 500 pounds. However, the lead time for ordering this steel is four months, and the company uses 150 pounds per month-an order point of 600 pounds-which is greater than the EOQ. Can you help this inventory clerk figure out how to handle this case, in which order point exceeds the EOQ?

13. West Coast Furniture Distributors is a company that buys large quantities of furniture from manufacturers at low prices, and then sells to the public at prices below what most furniture stores charge. To minimize costs, West Coast Furni-ture uses EOQ for ordering. For one particular model of sofa, the manufacturer has now agreed to cover part of the shipping costs, reducing the ordering cost from $50 per order to $40. At the same time, West Coast Furniture has been able to obtain lower interest rates on borrowed money, reducing its inventory carry-ing cost from 25% of unit cost to 20%. The company expects to sell 1,225 of these sofas per year and pays $100 to purchase each one.

a. What effect will the preceding changes have on the EOQ?

b. What effect will the preceding changes have on the total annual costs of ordering and carrying inventory?

14. Referring to Problem 13, how many days' worth of demand will be covered by each order of sofas?

15. A company maintains inventories of the following nine items. Based on this information, determine which are A items, B items, and C items.