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This article discusses solution of Inventory and Aggregate Planning based on case in
the book of supply chain by S. Chopra and Operation Management by J Heizer
Case 1
Motorola obtains cell phones from its contract manufacturer located in China to supply the U.S.
market, which is served from a warehouse located in Memphis, Tennessee. Daily demand at
the Memphis warehouse is normally distributed, with a mean of 5,000 and a standard deviation
of 4,000. The warehouse aims for a Type I CSL of 99 percent. The company is debating whether
to use sea or air transportation from China.
Sea transportation results in a lead time of 36 days and costs $0.50 per phone. Air transportation
results in a lead time of 4 days and costs $1.50 per phone. Each phone costs $100, and Motorola
uses a holding cost of 20 percent. Assume that Motorola takes ownership of the inventory on
delivery.
Assume that Motorola follows a periodic review policy. Given lot sizes by sea and air, Motorola
would have to place order every 20 days using sea transport but could order daily using air
transport a. Assume that Motorola follows a periodic review policy. What Order up to level
(OUL) and safety inventory should the warehouse aim for when using sea or air transportation?
How many days of safety inventory will Motorola carry under each policy?
b. How many days of cycle inventory does Motorola carry under each policy?
c. Under a periodic review policy, do you recommend sea or air transportation?
Answer: Given
𝑄 100.000 𝑄 5.000
Cycle Inventory = 2
= 2
= Cycle Inventory = = = 2.500
2 2
50.000 unit/ 20 days = 2.500 unit /day unit/day
Total Inventory = 55.920 + 2.500 = 58.420 Total Inventory = 18.640 + 2.500 = 21.140
Total cost = 58.420 x $ 0.5= $ 29.210 Total cost = 21.140 x $ 1.5= $ 31.710
Motorola should use Sea transport because it will give less cost compare to Air
transport
Case 2
TopOil, a refiner in Indiana, serves three customers near Nashville, Tennessee, and maintains
consignment inventory (owned by TopOil) at each location. Currently, TopOil uses TL
transportation to deliver separately to each customer. Each truck costs $800 plus $250 per
stop. Thus delivering to each customer separately costs $1050 per truck. TopOil is
considering aggregating deliveries to Nashville on a single truck. Demand at the large
customer is 60 tons a year, demand at the medium customer is 24 tons per year, and demand
at small customer is 8 tons per year. Product cost for TopOil is $10,000 per ton, and it uses a
holding cost of 25 percent. Truck capacity is 12 tons.
a. What is the annual transportation and holding cost if TopOil ships a full truckload each
time customer is running out of stock? How many days of inventory is carried at each
customer under this policy?
b. What is the optimal delivery policy to each customer if TopOil aggregates shipments to each
of the three customers on every truck that goes to Nashville? What is the annual transportation
and holding cost? How many days of inventory are carried at each customer under this policy?
c.what is the optimal delivery price to each customer if TopOil aggregates each shipments to
each of the three customers on every truck that goes to nashville? what is the total annual
transportatioin and hlding cost? how many days of inventory are carried at each customer under
this policy?
Answer: given
TC= $34375
Answer point C
S=$800, S1=S2=S3=$250
Ʃ 𝑫𝒊(𝒉)(𝑪𝒊) 𝟖(𝟎.𝟐𝟓)(𝟏𝟎.𝟎𝟎𝟎)+𝟐𝟒(𝟎.𝟐𝟓)(𝟏𝟎.𝟎𝟎𝟎)+𝟔𝟎(𝟎.𝟐𝟓)(𝟏𝟎.𝟎𝟎𝟎)
n=√ 𝟐𝑆 ∗
=√ 𝟐𝑆 ∗
= 𝟖. 𝟔 times/year
Annual order cost = 8.6 x $1550 = $13330
TC=$26455
Quantity order = Qsmall+Qmed+Qlarge =0.9+2.7+6.9=10.5 tons/order
Quantity order<Truck capacity
Case 3
Prefab, a furniture manufacturer, uses 20,000 square feet of plywood per month. It's trucking
company charges Prefab $400 per shipment, independent of the quantity purchased. The
manufacturer offers an all unit quantity discount with a price of $1 per square foot for orders
under 20,000 square feet, $0.98 per square feet, and $0.96 per square foot for orders larger than
40,000 square feet. Prefab incurs a holding cost of 20%. What is the optimal lot size for Prefab?
Answer = given
𝑞0 = 00000 𝐶0 = $1
𝑞1 = 20000 𝐶1 = $0.98
𝑞1 = 40000 𝐶2 = $0.96
Demand= 20000x12=240000/year
h= 0.2 S= $400
Step 1
Define EOQ in the lowest cost
2.𝐷.𝑆 2.(240000).(400)
EOQ (𝑄2 )= √ ℎ.𝐶 =√ = 31622
2 0.2.(0.96)
Check= 31622<40001 (not feasible)
Define T𝐂𝟐 !
𝐷 𝑞2 240000 40001
(𝑆)+ . (ℎ). (𝐶2 ) + 𝐷. (𝐶2 ) = ($400) + . (0.2). ($0.96) + 240000. ($0.96)
𝑞2 2 40001 2
= $236.640
2.𝐷.𝑆 2.(240000).(400)
EOQ (𝑄1 )= √ ℎ.𝐶 =√ = 31298
2 0.2.(0.98)
Check= 20000<31298<40000 (feasible)
Define T𝐂𝟏 !
𝐷 𝑞 240000 31298
(𝑆)+ 1 . (ℎ). (𝐶1 ) + 𝐷. (𝐶1 ) = ($400) + . (0.2). ($0.98) + 240000. ($0.98)
𝑞1 2 31298 2
= $241.334
T𝐂𝟐 < T𝐂𝟏 so optimal lot size, when order larger than 40000 square feet
Aggregate case
Missouri's Soda Pop Inc. has a new fruit drink for which it has high hopes. Steve Allen, the
production planner, has assembled the following data and demand forecast. He has to create
an aggregate plan. His three options are:
A) Chase Strategy that hires and fires personnel as necessary to meet the forecast
B) level strategy
C) a level strategy that produces 1200 cases per quarter and meets the forecast demand with
inventory and subcontracting
Quarter Forecast
1 1800
2 1100
3 1600
4 900
Costs
Pervious quarters inventory: 1300 cases
Beginning Inventory: 0 cases
Stockout Costs: $150 per case
Inventory Holding Costs: $40 per case at end of quarter
Hiring Employees: $40 per case
Firing Employees: $80 per case
Subcontracting Cost: $60 per case
Unit Cost on Regular Time: $30 per case
Overtime Cost: $15 extra per case
Capacity on Regular Time: 1800 cases per quarter
Answer=
Q Forecast Inventory Production Hiring Layoff Prod Hiring Layoff
Cost cost cost
A B C
($30) ($40) ($80)
0 - 1300 1300 500 - - 20000
1 1800 - 1800 - 700 54000 56000
2 1100 - 1100 500 - 33000 20000
3 1600 - 1600 - 700 48000 56000
4 900 - 900 - - 27000
Total cost = $314000 (plan A) 162000 40000 112000
b) Total cost
250(0)+250(1)+150(1.5)+80(2)+400(1)+80(1.5)+40(2)+800(1)+100(1.5)+400(1)+50(1.5)
= $2660
c) all regular time were used, so the answer No it does not