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practice_11_solution

# practice_11_solution - Practice#11 Solutions Inventory...

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Practice #11 Solutions Inventory Management BUAD311 – Operations Management Spring 2011 1. SY Manufacturers (SYM) is producing T-shirts 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 Luft-Geshfet-Textile (LGT) Company in Brazil. The pur- chasing price per pound is \$2.5 (paid only when the cotton arrives to the SYM’s facilit- ies) and transportation cost by sea is \$0.20 per pound. The traveling time from LGT’s fa- cility 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 lead-time 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 (04/01/2007-03/31/2008) 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 1

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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. Just describe the direction of the
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