INVENTORY

MANAGEMENT &
MRP
EXERCISES

POM COURSE – IM3013

Huynh Thi Phuong Lan, MBA
Inventory management:
1. How many/ much to order?
2. When to order?

EOQ

Independence POQ

Quantity
Demand
Discount

Independence MRP
INDEPENDENT
DEMAND
Economic Order Quantity Model (EOQ)

2SD
Q* 
H
Q= Number of pieces per order
Q* = Optimal number of pieces per order (EOQ)
D= Annual demand in units for the inventory item
S= Setup or ordering cost for each order
H= Holding or carrying cost per unit per year
Economic Order Quantity Model (EOQ)

2SD
Q* 
H
Q= Number of pieces per order
Q* = Optimal number of pieces per order (EOQ)
D= Annual demand in units for the inventory item
S= Setup or ordering cost for each order
H= Holding or carrying cost per unit per year
Quantity Discount Model

1. Calculate Q* for each price range

2. Adjust the Q to meet price condition
3. Calculate the total annual cost for each possible
order quantity determined in Step 2. Select the
quantity that gives the lowest total cost.
 Probabilistic Models and Safety Stock
ROP for unknown demand

• ROP = L*d + Safety stock (SS)

• Annual stockout costs = The sum of the units short for each demand level
× The probability of that demand level × The stockout cost/unit × The
number of orders per year
ROP for unknown demand and given service level:

• ROP = Mean demand during leadtime + Z*σ dLT

Z: number of standard deviations
σdLT : Standard deviation of during leatime
 Probabilistic Models and Safety Stock

ROP = average daily demand * Lead time in days + Z*σd* 𝑙𝑒𝑎𝑑𝑡𝑖𝑚𝑒 When demand is variable

ROP = daily demand * average Lead time in days + Z* Daily demand*σLT When lead time is variable

ROP = Average daily demand * average Lead time in days + Z*σdLT both are variable

σd: Standard deviation of demand per day

σLT: Standard deviation of leadtime in days

𝜎𝑑𝐿𝑇 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑙𝑒𝑎𝑑 𝑡𝑖𝑚𝑒 ∗ 𝜎𝑑2 + 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑑𝑒𝑚𝑎𝑛𝑑 2 ∗ 𝜎𝐿𝑇

2
1
The Warren W. Fisher Computer Corporation purchases 8,000
transistors each year as components in minicomputers. The unit
cost of each transistor is $10, and the cost of carrying one
transistor in inventory for a year is $3. Ordering cost is $30 per
order. What are
(a) the optimal order quantity
(b) the expected number of orders placed each year
(c) the expected time between orders? Assume that Fisher
operates on a 200-day working year.

Answers: a) 400; b) 20; c) 10

2
Discount Carpets manufactures Cascade carpet, which it sells in its
adjoining showroom store near the interstate. Estimated annual
demand is 20,000 yards of carpet with an annual carrying cost of
$2.75 per yard. The manufacturing facility operates the same 360
days the store is open and produces 400 yards of carpet per day.
The cost of setting up the manufacturing process for a production
run is $720. Determine the optimal order size, total inventory cost,
length of time to receive an order, and maximum inventory level.

(Answer: 3,488 yards; $8,258.3; 8.72 days; 3003 yards)

3
Annual demand for notebook binders at Meyer’s Stationery
Shop is 10,000 units. Brad Meyer operates his business 300
days per year and finds that deliveries from his supplier
generally take 5 working days. Calculate the reorder point for
the notebook binders.

(answer: ROP = 167 units)

4
Whole Nature Foods sells a gluten-free product for which the
annual demand is 5,000 boxes. At the moment, it is paying
$6.40 for each box; carrying cost is 25% of the unit cost;
ordering costs are $25. A new supplier has offered to sell the
same item for $6.00 if Whole Nature Foods buys at least
3,000 boxes per order. Should the firm stick with the old
supplier, or take advantage of the new quantity discount?

Answer: stay with old supplier

5
William Beville’s computer training school, in Richmond,
stocks workbooks with the following characteristics:
Demand D = 19,500 units/year
Ordering cost S = $25/order
Holding cost H = $4/unit/year
Price per unit: $10
a)Calculate the EOQ for the workbooks.
b)What are the annual holding costs for the workbooks?
c) What are the annual ordering costs?
d)What are the total inventory cost?
6
If D = 8,000 per month, S = $45 per order, and H = $2 per unit
per month
a)What is the economic order quantity?
b)How does your answer change if the holding cost doubles?
c) What if the holding cost drops in half?
7
Southeastern Bell stocks a certain switch connector at its central
warehouse for supplying field service offices. The yearly demand
for these connectors is 15,000 units. Southeastern estimates its
annual holding cost for this item to be $25 per unit. The cost to
place and process an order from the supplier is $75. The company
operates 300 days per year, and the lead time to receive an order
from the supplier is 2 working days.
a)Find the economic order quantity.
b)What is the reorder point?
8 Race One Motors is an Indonesian car manufacturer. At its
largest manufacturing facility, in Jakarta, the company produces
subcomponents at a rate of 300 per day, and it uses these
subcomponents at a rate of 12,500 per year (of 250 working
days). Holding costs are $2 per item per year, and ordering
(setup) costs are $30 per order.
a) What is the economic production quantity?
b) How many production runs per year will be made?
c) What will be the maximum inventory level?
d) What percentage of time will the facility be producing
components?
e) What is the annual cost of ordering and holding inventory?
9
Rad Manufacturing Company makes flashing lights for toys.
The company operates its production facility 300 days per
year. It has orders for about 12,000 flashing lights per year
and has the capability of producing 100 per day. Setting up the
light production costs $50. The cost of each light is $1. The
holding cost is $0.10 per light per year. What is the optimal
size of the production run?
10
Arthur is the production manager of WheelRite, a small producer
of metal parts. Wheel-Rite supplies CalTex, a larger assembly
company, with 10,000 wheel bearings each year. This order has
been stable for some time. Setup cost for Wheel-Rite is $40, and
holding cost is $.60 per wheel bearing per year. Wheel-Rite can
produce 500 wheel bearings per day. CalTex is a just-in-time
manufacturer and requires that 50 bearings be shipped to it each
business day.
a)What is the optimum production quantity?
b)What is the maximum number of wheel bearings that will be in
inventory at Wheel-Rite?
c) How many production runs of wheel bearings will Wheel-Rite
have in a year?
11
Bell Computers purchases integrated chips at $350 per chip. The holding
cost is $35 per unit per year, the ordering cost is $120 per order, and
sales are steady, at 400 per month. The company’s supplier, Rich Blue
Chip Manufacturing, Inc., decides to offer price concessions in order to
attract larger orders. The price structure is shown below.
Quantity purchased Price/unit
1-99 units $350
100-199 units $325
200 units or more $300
a)What is the optimal order quantity?
b) Bell Computers wishes to use a 10% holding cost rather than the
fixed $35 holding cost in (a). What is the optimal order quantity?
12

Wang Distributors has an annual demand for an airport

metal detector of 1,400 units. The cost of a typical
detector to Wang is $400. Carrying cost is estimated to
be 20% of the unit cost, and the ordering cost is $25
per order. If Ping Wang, the owner, orders in quantities
of 300 or more, he can get a 5% discount on the cost
of the detectors. Should Wang take the quantity
discount?
13
Authentic Thai rattan chairs (shown in the photo) are delivered to
Gary Schwartz’s chain of retail stores, called The Kathmandu Shop,
once a year. The reorder point, without safety stock, is 200 chairs.
Carrying cost is $30 per unit per year, and the cost of a stockout is
$70 per chair per year. Given the following demand probabilities
during the lead time, how much safety stock should be carried?
Demand during leadtime Probability
0 0.15
100 0.2
200 0.3
300 0.2
400 0.15
14
Tobacco is shipped from North Carolina to a cigarette
manufacturer in Cambodia once a year. The reorder point, without
safety stock, is 200 kilos. The carrying cost is $15 per kilo per year,
and the cost of a stockout is $70 per kilo per year. Given the
following demand probabilities during the lead time, how much
safety stock should be carried?
Demand during leadtime Probability
0 0.1
100 0.1
200 0.2
300 0.4
400 0.2
15

Chicago’s Hard Rock Hotel distributes a mean of 1,000 bath towels per day to
guests at the pool and in their rooms. This demand is normally distributed with
a standard deviation of 100 towels per day, based on occupancy. The laundry
firm that has the linens contract requires a 2-day lead time. The hotel expects a
98% service level to satisfy high guest expectations. What is the ROP?
16
Tara McCoy is the office administrator for the Department of Management at
State University. The faculty uses a lot of printer paper and Tara is constantly
reordering and frequently runs out. She orders the paper from the university
central stores and several faculty have determined that the lead time to receive
an order is normally distributed, with a mean of 2 days and a standard deviation
of 0.5 day. The faculty have also determined that daily demand for the paper is
normally distributed, with a mean of 2.6 packages and a standard deviation of
0.8 packages. What reorder point should Tara use in order not to run out 99%
of the time?
DEPENDENT
DEMAND
MRP
1. Net requirement Plan
*Low-level coding means that: when the item exist at various
levels in the BOM, it is coded at the lowest level.

2. Lot sizing Techniques

Lot-for-lot
EOQ
POQ
Interval = POQ/average demand
17
Item Leadtime Quantity on hand
Alpha 1 10
B 2 20
C 3 0
D 1 100
E 1 10
F 1 50

Prepare a Net MRP Plan for Alpha with

the given MPS below:

Period 6 7 8 9 10 11 12 13
Gross Req. 50 50 100
18

Hip Replacements, Inc., has a master production schedule for its newest model,
as shown below, a setup cost of $50, a holding cost per week of $2, beginning
inventory of 0, and lead time of 1 week

Week 1 2 3 4 5 6 7 8 9 10
Gross Req. 50 35 15 100
What are the costs of using (a) Lot-for-lot; (b) EOQ and (c) POQ for this 10-
week period?
19
The demand for S is 100 units in week 7. Each unit of S requires 1 unit of T
and 2 units of U. Each unit of T requires 1 unit of V, 2 units of W, and 1 unit of
X. Finally, each unit of U requires 2 units of Y and 3 units of Z. One firm
manufactures all items. It takes 2 weeks to make S, 1 week to make T, 2
weeks to make U, 2 weeks to make V, 3 weeks to make W, 1 week to make X,
2 weeks to make Y, and 1 week to make Z.
a) Construct a product structure. Identify all levels, parents, and components.
b) Construct a net material requirements plan using the following on-hand
inventory.

Item On hand inventory Item On hand inventory

S 20 W 30
T 20 X 25
U 40 Y 240
V 30 Z 40
20
Grace Greenberg, production planner for Science and Technology Labs, in New
Jersey, has the master production plan shown in Table below.
Given:
Lead time = 1 period; setup costs = $200; holding cost = $10 per week; stockout
cost = $10 per week.
Develop an ordering plan and costs for Grace, using these techniques:
a) Lot-for-lot.
b) EOQ.
c) POQ.
d) Which plan has the lowest cost?

Week 1 2 3 4 5 6 7 8 9 10 11 12
Gross 35 40 10 25 10 45
Req.
21
The Alpha Beta Company produces two products; A and B, that are made from
components C and D. Given the following product structures, master scheduling
requirements, and inventory information, determine when orders should be
released for A, B, C, and D and the size of those orders.
Item On Schedule Lot size
hand receipts
A 10 L4L
B 50 L4L
C 140 Min 50
D 200 250, Mult.
period 2 250

Period 1…5 6 7 8
Gross Requirements 200 100
22

Period 1 2 3 4 5
Demand 20 40 30 10 45

Ordering cost = $100 per order

Holding cost = $1 per unit per period
Lead time = 1 period
Beginning inventory = 25 units

Complete an MRP matrix using: (a) L4L, (b) EOQ, and (c) POQ lot sizing.
Which lot-sizing rule do you recommend?