PROBLEMS IN SCM

1. Weekly demand at ABC Ltd. is normally distributed, with a

mean of 3000 and a standard deviation of 1000. The lead
time for replenishment is 1week. Demand in one week is
independent of the previous weeks demand. What is the
expected level of CSL, if the company orders at the ROL of
4000, 5000 and 6000? Comment on the relative merits of
these three alternatives. If the lead time increases by one
week What will be the above figures? The company wants to
have a CSL of 95% now. What should be the level of safety
stock maintained?
Sol:
In this case, we have ROP=4000, L=2 ,
D=3000 /week,
Standard deviation: 1000
Demand for Lead-time =D*L =1*1000=1000,
Standard deviation lead-time=

21000 =1414

CSL=F (ROP, DL, STANDARD DEVIATION) = NORMDIST (ROP, DL, STANDARD

DEVIATION, 1)

= NORMDIST (4000, 3000, 1414,1) =0.76

A CSL of 0.76 implies that in 76 percent of the Replenishment cycles of ABC
ltd supplies all demand from available inventory. In the remaining 24percent
of the cycles, stock outs occur and some demand is not satisfied because of
the lack of inventory.

ROP= 5000
= NORMDIST (5000, 3000, 1414,1) =0.92
A CSL of 0.92 implies that in 92 percent of the Replenishment cycles of ABC
ltd supplies all demand from available inventory. In the remaining 8percent

of the cycles, stock outs occur and some demand is not satisfied because of
the lack of inventory.

ROP=6000
= NORMDIST (6000,3000,1414,1) =0.98
A CSL of 0.98 implies that in 98 percent of the Replenishment cycles of ABC
ltd supplies all demand from available inventory. In the remaining 2 percent
of the cycles, stock outs occur and some demand is not satisfied because of
the lack of inventory.

LEVEL OF STOCK MAINTAINED:

NORMSINV (0.95)*1414 = 2325.823
Thus, the required level of stock maintained to achieve a CSL of
95 percent is 2326
2. A Retail Chain has 4 outlets in one area. The weekly demand
for a particular product in each of these ffxoutlets is normally
distributed with a mean of 100 units and st. dev of 20 units.
The lead time to get supplies from the manufacturer is 2
weeks. If the demands in each of these outlets can be
assumed to be independent of each other, discuss the
benefits of aggregation in order placing after arriving at the
levels of inventory. Assume a CSL of 90%.
Sol:
Standard deviation OF weekly demand, =20
Replenishment lead time L=2 weeks
Total required inventory =K* F-1 (CSL)*

L *Standard deviation

= 4*NORMSINV (0.9)*1.414*20 = 145 Units.

Now consider the aggregate option. Because demand in all four areas is
independent the standard deviation of weekly demand at central outlet =

4 * 20=40

Inventory required for aggregate option = NORMSINV (0.9)*1.414*40 =

72.48
In the above discussion demonstrate that aggregation reduces demand
uncertainty and thus required safety inventory as long as the demand
being aggregated is not perfectly positive correlated across near by
regions. In contrast, products such as milk and sugar are likely to have
demand that is much more independent across regions. if demand in
different geographic regions is about the same size and independent,
aggregation reduces safety by the square root of number of areas
aggregated. If the no of independent stocking location decreases by a
factor of n the average safety inventory is expected to decrease by a
factor of n the average safety inventory is expected to decrease by a
factor of

n .

3.A manufacturer has identified two distinctly different customer

segments. While the demand from the first segment is given by
D = 20000 30p (where p is the price ),
the demand for the other segment is given by
D = 20000-10p. The cost of manufacturing per unit is Rs 20.
i)
What price should the manufacturer charge for each of
the two segments if there is no capacity constraint?
ii)
If both the segments are to be charged the same price,
what will it be?
iii) What is your conclusion from the above?
iv) If the capacity is restricted to 17000 units,what are the
optimal numbers? Comment on the results.
Sol:
i) With out capacity constraints, the differential prices to be
charged each segment are
P1=( 20000/(2*30)) +(20/2)= Rs 343.3
P2=( 20000/(2*10)) +(20/2)= Rs 1010
The demand from the two segments is given by.
D1=20000-30*343.3 = 9701
D2=20000-10*1010 = 9900
2). If both the segments are to be charged the same price

(p-20)(20000-30p)+ (p-20)(20000-10p)= (p-20)(40000-40p)

The optimal price is this case: p=(40000/(2*60)) + 20/ 2 = Rs
510
Demand of two segment is
D1=20000-30*510= 4,700
D2=20000-10*510= 14,900
If the capacity is restricted to 17000 units , the optimal
differential price results in demand that exceeds total production
capacity.
Thus max(p1-20)(20000-30p1) +(p2-10)(20000-10p2)
Subject to
(20000-30p1) +(20000-10p2)<= 17,000
(20000-30p1) , (20000-10p2)>=0
The result of the constrained optimization observe that the
limited capacity leads the manufacturer to charge a higher price
to each of the segments relative to when there was no capacity
limit.