Inventory Analysis Assignment
1. You hear someone comment that any inventory is a sign of waste. Do you agree or disagree? Can managers simultaneously justify holding inventories and still seek out ways to lower inventory levels?
2. What two basic questions must be answered by an inventory-control decision rule?
3. Match the term with its definition or meaning according to the EOQ model.
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a.
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Number of annual orders
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z
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b.
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Ordering cost
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2. s2L
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c.
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Average inventory
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3. DP
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d.
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Holding cost
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4. SS
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e.
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Variance in lead time
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5. D/Q
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f.
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Variance in demand
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6. S
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g.
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ROP for fixed demand rate and lead time
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7. Q/2
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h.
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Customer Service level
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8. dL
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i.
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Annual cost of inventory
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9. s2d
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j.
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Extra amount of inventory beyond that needed to meet average demand during lead time
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10. H
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4. (Use the EOQ and ROP formulas to answer this question.) Which variables could you change in each equation if you wanted to reduce inventory costs in your organization? Which one would you prefer to change? Why?
5. Discuss the general procedure for determining the order quantity when price breaks are involved. Would there be any difference in procedure if holding cost were a fixed percentage of price rather than a constant amount?
6. Mellow's Online Pet Shop sells 40,000 bags of dog biscuits every year. The fixed ordering cost is $15 and the cost of holding a bag in inventory for the year is $2.
a. What is the Economic Order Quantity?
b. Suppose demand for the dog biscuits doubles to 80,000. What is the new EOQ? Does the EOQ also double?
7. You work at an office supply store and have the following information regarding the best selling printer at your store:
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Average weekly demand (52 weeks per year)
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60
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printers
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Std dev of weekly demand
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12
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printers
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Order lead time
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3
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weeks
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Std dev of order lead time
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0
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(lead times are constant)
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Item cost
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$120
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Cost to place an order
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$2
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Yearly holding cost per printer
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$48
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Desired service level during reordering period
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99%
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(z = 2.33)
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a. What is the EOQ?
b. Calculate the ordering and holding costs (ignoring safety stock) for the EOQ. What do you notice about the two?
c. Suppose instead of the EOQ, you currently order 50 printers at a time. How much more or less would you pay in holding and ordering costs per year if you switched to ordering at the EOQ level?
d. What is the reorder point for the printers? How much of the reorder point consists of safety stock?
e. What is the reorder point if the lead time is not consistent at 15 days, but instead has a standard deviation of 0.5 days?
8. Nittany Shoe Repair specializes in repairing leather soles. It buys these soles from HB Soles (HBS) at a price of $8 per pair. HBS has offered Nittany Shoe Repair the following pricing schedule:
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Quantity
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Price
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1-50
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$8
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51-100
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$7.60
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100+
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$7.40
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Nittany Shoe Repair estimates annual demand to be 625 pairs of soles. Holding costs are 20 percent of the unit price. The cost to place an order is $10.
a. What is the optimal order size under EOQ?
b. What price would Nittany Shoe Repair I fit ordered the EOQ quantity?
c. What is the total cost using the EOQ model?
d. What is the total cost for each price level? (NOTE: Some may be infeasible if EOQ is greater than the quantity required.)
e. Which amount should the firm order?
9. OfficeMax is considering using the Internet to order printers from Hewlett-Packard. The change is expected to make the cost of placing orders drop to almost nothing, although the lead time will remain the same. Using EOQ, ROP, and the TAC formulas, what happens to...
a. The order quantity?
b. The holding costs for the year?
c. The ordering costs for the year?