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Practice #10
Solutions
Inventory Management
BUAD311
–
Operations Management
Fall 2009
Hiroshi Ochiumi
1.
SY Manufacturers (SYM) is producing Tshirts in 3 colors: red, blue and white. The
monthly demand for each color is 3000 units.
Each shirt requires 0.5 pounds of raw cot
ton that is imported from the LuftGeshfetTextile (LGT) Company in Brazil.
The pur
chasing price per pound is $2.5 (paid only when the cotton arrives to the SYM’s facil
i
ties) and transportation cost by sea is $0.20 per pound.
The travel
ing time from LGT’s
facility in Brazil to the SYM facility in the USA is 2 weeks.
The cost of placing a cotton
order, by SYM, is $100 and the annual interest rate that SYM is facing is 20%.
a.
What is optimal order quantity of cotton?
Total demand (D) = 3*12 months * 3000 units * 0.5 pound = 54000 pounds
Total purchasing cost per unit (c) = $2.5 + $0.20 = 2.70
Set up cost (S) = $100
Holding cost per unit = 2.70 * 20% = $0.54
pounds
H
DS
EOQ
4472
54
.
0
100
*
54000
*
2
2
4,472 pounds per order.
b.
How frequent should the company order cotton?
Let us begin with the number of orders.
Number of orders = Total demand / EOQ = 54000 / 4472 = 12.08 times
That is the SYM orders 12.08 times a year.
The company orders every 12 months / 12.08 = 0.99 months
c.
Assuming that the first order is needed in 04/01/2007 when should SYM place the
order?
Recall that the delivery leadtime is 2 weeks.
Thus, the company needs to order the
cotton two weeks in advance, which is 03/15/2007.
d.
How many orders will SYM place during the year (04/01/200703/31/2008)
See answer to question b.
e.
What is the resulting annual holding cost?
Annual holding cost = H*Q/2 = 0.54 * 4472 / 2 = $1207 per year.
f.
What is the resulting annual ordering cost?
Annual ordering cost = Number of orders * ordering cost = 12.08 * 100 = $1208
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g.
If the annual interest cost is only 5% how will it affect the annual number of or
ders, the optimal batch size and the average inventory (You are not expected to
provide a numerical answer to this question.
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 '07
 Vaitsos
 Management, Normal Distribution, IIS

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