Supply Sol

1 )What trade-offs are involved in each of these aspects of inventory management?

a) Buying additional additional amounts amounts to take advantage advantage of quantity quantity discounts. discounts.

Buying additional amounts to take advantage of quantity discounts: If a painter orders 200 gallons of water paints for $4.7 per gallon wit! all t!e factors remaining t!e same" !e would #e on a positive side" if t!e supplier offers discounts on t!e purc!ase of more quantity. !e #uyer would save on money on t!e total cost of water paints. %owever" it may #e possi#le t!at t!e !ig!er supplier of water paints may get damaged in transit or gets damaged in t!e ware!ouse. !ere can #e various reasons t!at can  prove to #e !armful to t!e #uyer on ordering !ig!er ! ig!er quantity of water paints. %ence" in suc! a situation" t!e tradeoffs are t!e t!reats t!at can #e faced #y t!e #uyer on t!e  purc!ase of water pains in large quantity and on t!e ot!er !and saving some #ucks in t!e form of quantity discounts offered #y t!e supplier.

b) Treatin eating g holdi holding ng cost cost as a perc percen entag tagee of un unit it price pricess inste instead ad of as a consta constant nt amount.

reating !olding cost as a percentage of unit prices instead as a constant amount: If  t!e unit price of t!e product increases" t!e !olding cost will also !ike. If one goes #y t!e &conomic 'rder (uantity approac!" one would #e required to place smaller  orders" w!ic! would result in lesser inventory. 'n t!e ot!er !and" if t!e !olding cost is constant" t!ere would #e no c!ange in inventory decisions and t!e unit cost of t!e  product would remain t!e same. %ence" t!ere no suc! trade)off in t!e first case" as t!ere is direct relations!ip #etween t!e !olding cost and unit price of products. !e  #uyer is not gaining or losing in t!e #uying process. *imilarly" *imilarly" in t!e second condition" no suc! trade off occurs.

discuss invento inventory ry managem management ent we often often emphasi emphasiss the importa importance nce of  2 )When we discuss service level which is typically defined as a percentage of customers! demand that is satisfied with inventory. "n other words managers would like to maintain certain service level to prevent the #shortage$. %ow think as a supermarket manager how would you go about evaluating the criticalness of an inventory shortage?

+s a manager of a supermarket an individual can evaluate t!e criticalness of an inventory s!ortage #y evaluating !ow many customers visit t!e super market per day in average and w!at w!at is t!e averag averagee demand demand of custom customers ers t!at visit visit t!e market. market. !is !is will will give give t!e estimates of maintaining t!e required inventory in t!e super market.

3 ) &'bout lead time and safety stock)

' local ice cream shop (weet ream *airy is known for its walnut fudge ice cream. The shop manager +oe has estimated that demand for walnut fudge ice cream can be appro,imated by a normal distribution with a mean of  gallons per week and a standard deviation of /.0 gallons per week. +oe would like to maintain a service level of 12 percent. 3ead time for this particular ice cream is about two days. With the ownership change of the creamery +oe feels that the lead time for this ice cream is not as certain as before. 4e estimates that the standard deviation of the lead time is about  day. (weet ream *airy is open seven days a week. &4int5 work in terms of  weeks) a) What is the safety stock that +oe has to keep to maintain the 126 service level?

*afety *tock , -  *igma , /.1  . , 4.1 allons b) "f +oe works with the supplier and makes sure that walnut fudge ice cream will always be delivered on time how much safety stock can he reduce? *afety *tock , -  *igma , /.1   , 4./4 allons 3eduction in *afety *tock , 4.1)4./4 , 0.5 allons

c) "f +oe has adopted a 7e-8rder 9oint &789) model what is the 789 for walnut fudge ice cream? &consider the standard deviation of the lead time is  day)

/6 3eorder oint , 8 9 - *igma 2/ /.1  .6 , 2.1 26 3eorder oint , 8 9 - *igma , 2/ 9 /.1  6

, 2./4

4 )&'bout coefficient of variation)

:arden ;ariety