SUPPLY CHAIN INVENTORY MANAGEMENT CHAPTER 9
is interpreting the results in making decisions, the software re-
places entirely the manual calculations.
1. A part is produced in lots of 1,000 units. It is assembled
from 2 components worth $50 total. The value added in
production (for labor and variable overhead) is $60 per
unit, bringing total costs per completed unit to $110. The
average lead time for the part is 6 weeks and annual de-
mand is 3,800 units, based on 50 business weeks per year.
a. How many units of the part are held, on average, in cycle
inventory? What is the dollar value of this inventory?
b. How many units of the part are held, on average, in
pipeline inventory? What is the dollar value of this in-
ventory? (Hint: Assume that the typical part in pipeline
inventory is 50 percent completed. Thus, half the labor
and variable overhead cost has been added, bringing
the unit cost to $80, or $50 + $60/2.)
2. Prince Electronics, a manufacturer of consumer elec-
tronic goods, has five distribution centers in different
regions of the country. For one of its products, a high-
speed modem priced at $350 per unit, the average weekly
demand at each distribution center is 75 units. Average
shipment size to each distribution center is 400 units, and
average lead time for delivery is 2 weeks. Each distribu-
tion center carries 2 weeks’ supply as safety stock but
holds no anticipation inventory.
a. On average, how many dollars of pipeline inventory
will be in transit to each distribution center?
b. How much total inventory (cycle, safety, and pipeline)
does Prince hold for all five distribution centers?
3. Terminator, Inc., manufactures a motorcycle part in lots of
250 units. The raw materials cost for the part is $150, and
the value added in manufacturing 1 unit from its compo-
nents is $300, for a total cost per completed unit of $450.
The lead time to make the part is 3 weeks, and the annual
demand is 4,000 units. Assume 50 working weeks per year.
a. How many units of the part are held, on average, as
cycle inventory? What is its value?
b. How many units of the part are held, on average, as
pipeline inventory? What is its value?
4. Oakwood Hospital is considering using ABC analysis to
classify laboratory SKUs into three categories: those that
will be delivered daily from their supplier (Class A items),
those that will be controlled using a continuous review
system (B items), and those that will be held in a two bin
system (C items). The following table shows the annual
dollar usage for a sample of eight SKUs. Rank the SKUs,
and assign them to their appropriate category.
SKU Dollar Value Annual Usage
1 $0.01 1,200
2 $0.03 120,000
3 $0.45 100
4 $1.00 44,000
5 $4.50 900
6 $0.90 350
7 $0.30 70,000
8 $1.50 200
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5. Southern Markets, Inc., is considering the use of ABC
analysis to focus on the most critical SKUs in its inven-
tory. Currently, there are approximately 20,000 different
SKUs with a total dollar usage of $10,000,000 per year.
a. What would you expect to be the number of SKUs and
the total annual dollar usage for A items, B items and C
items at Southern Markets, Inc.?
b. The following table provides a random sample of
the unit values and annual demands of eight SKUs.
Categorize these SKUs as A, B, and C items.
SKU Code Unit Value Demand (Units)
A104 $2.10 2,500
D205 $2.50 30
X104 $0.85 350
U404 $0.25 250
L205 $4.75 20
S104 $0.02 4,000
X205 $0.35 1,020
L104 $4.25 50
6. Yellow Press, Inc., buys paper in 1,500-pound rolls for
printing. Annual demand is 2,500 rolls. The cost per roll
is $800, and the annual holding cost is 15 percent of the
cost. Each order costs $50 to process.
a. How many rolls should Yellow Press, Inc., order at a time?
b. What is the time between orders?
7. Babble, Inc., buys 400 blank cassette tapes per month for
use in producing foreign language courseware. The ordering
cost is $12.50. Holding cost is $0.12 per cassette per year.
a. How many tapes should Babble, Inc., order at a time?
b. What is the time between orders?
8. At Dot Com, a large retailer of popular books, demand
is constant at 32,000 books per year. The cost of placing
an order to replenish stock is $10, and the annual cost of
holding is $4 per book. Stock is received 5 working days
after an order has been placed. No backordering is al-
lowed. Assume 300 working days a year.
a. What is Dot Com’s optimal order quantity?
b. What is the optimal number of orders per year?
c. What is the optimal interval (in working days) between
orders?
d. What is demand during the lead time?
e. What is the reorder point?
f. What is the inventory position immediately after an
order has been placed?
9. Leaky Pipe, a local retailer of plumbing supplies, faces de-
mand for one of its SKUs at a constant rate of 30,000 units
per year. It costs Leaky Pipe $10 to process an order to
replenish stock and $1 per unit per year to carry the item
in stock. Stock is received 4 working days after an order is
placed. No backordering is allowed. Assume 300 working
days a year.