ISE 216

Question Hour
Chapter 5


Mar. 30th 2011
Q 5.10
Happy Henrys car dealer sells an imported car called the EX123. once every
three months, a shipment of the cars is made to Happy Henrys.
Emergency shipments can be made between these three-month intervals
to resupply the cars when inventory falls short of demand. The emergency
shipments require two weeks, and buyers are willing to wait this long for
the cars, but will generally go elsewhere before the next three month
shipment is due. From experience, it appears that the demand for EX123
over a three-month interval is normally distributed with mean of 60 and a
variance of 36. the cost of holding an EX123 for one year is $500.
emergency shipments cost $250 per car over and above normal shipping
cost.
a) How many cars should they be purchasing every three months?
b) Repeat the calculations, assuming that excess demand are back ordered
form one three-month period to the next. Assume a loss-of-goodwill cost
of $100 for customers having to wait until the next three-month period
and acost of $50 per customer for bookkeeping expenses.
c) Repeat the calculations, assuming that H. H. s out of stock. The customer
will purchase the car elsewhere. In this case assume that the car cost H.
H. an average of $10000 and sell for an average of $13500. gnore loss-of-
goodwill costs.
A 5.10
a) A period is three months. Holding cost per year is $500, which means that the cost
for a 3-month period is:
500/4 = $125 = c
0

c
u
= 250 (emergency shipment cost)
Critical ratio = = .667 z = .44.
Hence Q
*
= oz + = (6)(.44) + 60 = 62.64 ~ 63 cars

b) c
u
= 150 Critical ratio = = .5454
c
0
= 125
F(Q
*
) = .5454 z = .11
Q
*
= oz + = (6)(.11) + 60 = 60.66 ~ 61 cars.

c) This corresponds to an infinite horizon problem with lost sales. From part 3 of
Appendix B at the end of the chapter.
c
u
= lost profit = $3,500
c
0
= holding cost = 125
Critical ratio = = .9655
z = 1.82 which gives Q
*
= (6)(1.82) + 60 = 70.92 ~ 71 cars.
250
250 + 125
=
2
3
150
150 +125
3500
3500 +125
Q 5.13
An automotive warehouse stocks a variety of parts that are sold at the
neighborhood stores. One particular part, a popular brand of ail
filter, is purchased by the warehouse for $1.5 each. It is estimated
that the cost of order processing and receipt is $100 per order. The
company uses an inventory carrying charge based on a 28 percent
annual interest rate. The mothly demand for the filter folows a
normal distribution with mean 280 and a standart deviation 77.
order lead time is assumed to be five months. Assume that a filter
is demanded when the warehouse is out of stock, then the demand
is back ordered, and the cost assesed for each back ordered
demand is $12.80. Determine the following quantities:
a) The optimal values of the order quantity and the reorder level.
b) The average annual cost of holding, set up, and stock out
associated with this itemassuming that an optimal policy is used.
c) Evaluate the cost of uncertainty for this process. That is, compare
the average annual cost you obtained in part b with the average
annual cost that would be incurred if the lead time demand had
zero variance.
A 5.13
a) h = (1.50)(.28) = .42
K = 100
p = 12.80
= (280)(12) = 3360
* = (280)(5) = 1400
o* = 77 = 172.18
## Those having * sign, are replenishment time parameters.

EOQ = Q
0
= = 1265

1 - F(R
1
) = = .0124
z
1
= 2.24, R=172.18*2.24+1400=1785.683
L(z
1
) = .0044, n(R
1
) = .75
Q
1
= = 1324



1 - F(R
2
) = = .0129
z
2
= 2.23 R =oz+ = (172.18)(2.23) + 1400 =1784
L(z
2
) = .004486 n(R
2
) = .77
Q
2
= = 1326


Close enough to stop.

z = 2.23, R = oz + = (172.18)(2.23) + 1400 =1784

Optimal (Q,R) = (1326,1784)
5
2K
h
+
(2)(100)(3360)
.42
Qh
p
=
(1265)(. 42)
(12.80)(3360)
2
h
K + pn(R) | | =
(2)(3360)
.42
100+ 12.80(.75) | |
Qh
p
=
(1324)(. 42)
12.80(3360)
2(3360)
.42
100 +12.80(.77) | |
A 5.13
b) G(Q,R) =
setup cost = = $253.39
holding cost = h = $439.74
stock out cost= = $24.97
G(Q,R) = $718.10


c) o = 0 Apply basic EOQ formula
EOQ = 1265
G(Q) = (K*lambda) / Q + h* (Q /2) = $531.26

cost of uncertainty = $718.10-531.26 =$186.84 yearly.
K
Q
+ h
Q
2
+ R


(

+
pn(R)
Q
K
Q
=
(100)(3360)
1326
Q
2
+ R


(

pn(R)
Q
=
(12.80)(3360)(. 77)
1326
Q 5.14
Weisss Paint Store uses a (Q,R) inventory system to control its
stock levels. For a particularly popular light latex paint,
historical data show that the distribution o monthly
demand is approximately normal, with mean 28 and
standard deviation 8. replenishment lead time for this paint
is about 14 weeks. Each can of paint costs the store $6.
although excess demands are back-ordered, the store
owner estimates that unfilled demands cost about $10
each in bookkeeping and loss-of-goodwill costs. Fixed costs
of replenishment are $15 per order, and holding costs are
based on a $30 percent annual rate of interest.
a) What are the optimal lot sizes and reorder point for this
bramd of paint?
b) What is the optimal safety stock for this paint?
A 5.14
a) Monthly demand is normal ( = 28, o = 8)
= 14 weeks = 3.5 months LTD ~ normal
with * = (28)(3.5) = 98
o* = (8) = 15
h = Ic = (.3)(6) = 1.8
= (28)(12) = 336 year
p = 10
K = 15
= 98


Q
0
= EOQ = = 75


1 - F(R
1
) = = .04 z = 1.75 giving
R
1
= oz + = 124
L(z)= 0.016173 n(R
1
) = 0.2426
Q
1
= = 81


1 - F(R
2
) = = .0434
z = 1.71 R
2
= oz+ = 124. Since R
2
= R
1
, we stop.

Conclude that (Q,R) = (81,124)

## We can stop either controlling R or Q values. Both are
possible...

b) S = R - = 124 - 98 = 26 units.
3.5
(2)(336)(15)
1.8
(75)(1.8)
(10)(336)
(2)(336)
1.8
(15+ (10)(. 2426))
(81)(1.8)
(10)(336)
Q 5.15
After taking a production seminar, the owner of Weisss
Paint Store mentioned in Problem 14, decides that his
stock out cost of $10 may not be very accurate and
switches to a service level model. He decides to set his
lot size by the EOQ formula and determines his reorder
point so that there is no stock-out in 90 percent of the
order cycles.
a) Find the resulting (Q,R) values.
b) Suppose that unfortunately, he really wanted to
satisfy 90 percent of his demands (that is, achieve a
90 percent fill rate). What fill rate did he actually
achieve from the policy determined in part (a)?
A 5.15
a) Type 1 service of 90%

EOQ = 75 (from 14 (a))

F(R) = .10, z = 1.28, R = oz + = (15)(1.28) + 98 = 117

Q,R) = (75,117)

b) Find Type II service level achieved in part (a).


n(R)
Q
= 1 | =
oL(z)
Q
=
(15)(. 0475)
75
= .0095

| = .9905 (99.05% service level)
## L(z) is found from standard L(z) table. You do not
calculate it by yourself as you did the (Q 5.14).