Deck 12: Inventory Models

Question 1

The opportunity cost of having money tied up in inventory is a type of ____ cost:

A) setup
B) production
C) carrying
D) penalty

Answer 1

C

Question 2

The basic economic order quantity (EOQ)model can be formulated as a linear model in Solver.

Answer 2

False

Question 3

In a probabilistic inventory model,there is no guarantee that the planned safety stock will exist.

Answer 3

True

Question 4

Critical fractile analysis enables you to see how net profit is distributed for a given order quantity,but it isn't well suited to finding the optimal order quantity.

Question 5

Any particular service level constraint in a probabilistic inventory model can be equivalently formulated with an appropriate unit holding cost

Question 6

The annual ordering cost in the economic order quantity (EOQ)model is:

A) D/Q
B) KD/Q
C) icQ/2
D) (s+ic)Q/2

Question 7

An order cycle begins each time an order arrives and ends just before the next order arrives.

Question 8

Which of the following is not one of the factors which influence the decision about how much safety stock a company should hold?

A) Variance of demand during lead time
B) Variance of the length of the lead time
C) Variance of the cost of stockout
D) Desired service level

Question 9

In the basic economic order quantity (EOQ)model,the annual ordering cost and the annual holding cost are always equal.

Question 10

When customer demand is known,the resulting inventory model is called:

A) normal
B) uniform
C) deterministic
D) probabilistic

Question 11

In specifying an (R,Q)ordering policy,the choice of R depends largely on:

A) How shortage costs are measured
B) Fixed ordering costs
C) Nonfinancial holding costs
D) Financial holding costs

Question 12

Which of the following is not one of the important issues in inventory models?

A) Whether demand is generated internally or externally
B) Whether the company orders the products it needs from a supplier or produces them internally
C) Whether the inventory is stored onsite or offsite
D) Whether inventory is reviewed continuously or periodically

Question 13

Which of the following is not one of the assumptions in an economic order quantity (EOQ)model?

A) Orders can be placed at any time
B) Demand is constant
C) Lead time for delivery of the product from the supplier is constant
D) Annual holding cost is constant

Question 14

The time it takes for an order to arrive at facility is called the stockout time.

Question 15

In an economic order quantity (EOQ)model with shortages allowed,the decision variables are:

A) Q,the order quantity and b,the maximum amount backlogged
B) Q,the order quantity and p,the unit penalty cost
C) D,the demand and b,the maximum amount backlogged
D) D,the demand and p,the unit penalty cost

Question 16

The annual shortage cost in an economic order quantity (EOQ)model with shortages allowed is pb²/Q.

Question 17

Uncertainty about lead time in a probabilistic inventory model adds to the uncertainty about the demand during lead time.

Question 18

The only real cost benefit from synchronizing orders for several products is reduced setup costs.

Question 19

Which of the following is a reason that motivates a company to carry as little inventory as possible?

A) The fixed cost of ordering
B) The desire not to run out of products that customers demand
C) The lead time to process a supply order
D) Interest costs

Question 20

Which of the following is one of the two ways to "cost" shortages in inventory modeling?

A) Lengthening the order cycle
B) Constraining the lead time for orders
C) Increasing the cost of the safety stock
D) Constraining the service level

Question 21

Exhibit 12-2
A moving company purchases large cardboard shipping boxes from a supplier.The company uses approximately 10,000 of these boxes for packing customers' belongings each year,and demand for the boxes is essentially constant throughout the year.The box supplier offers the following pricing schedule,based on the quantity of boxes ordered: The fixed cost of placing an order is $50,and the company's cost of capital is 7% per year.
An electronics retailer sells 2,500 units of a particular type of DVD player each year,with demand being essentially constant throughout the year.The retailer orders its DVD players from a regional supplier,and each time an order is placed an ordering cost of $100 is incurred.However,the retailer also has the option to make an investment to reduce the ordering costs.For each $2,000 it invests,ordering costs will decrease by 10%,down to a minimum of $30,at which point the cost cannot be further reduced.The unit cost of the each DVD player is $300 and there are no storage costs.Assuming a 7% cost of capital,formulate a Solver model to optimize the retailer's optimal order policy.How much,if any,should be invested in ordering cost reductions and what is the resulting order cost?

Question 22

Exhibit 12-3
The North Slope clothing store chain sells approximately 26,000 units of its most popular cotton sweater each year.North Slope buys these sweaters from a manufacturer located in Canada.The fixed cost of placing an order for this particular product is $200.North Slope pays $10 for each cotton sweater.The company's cost of capital is 11%,and the cost of storing a sweater for one year is $1.10.While North Slope prefers not to backlog customer demand,management of the company believes that it can afford to run out of sweaters on an occasional basis.The company estimates that the shortage cost per sweater per year is about $20.
Refer to Exhibit 12-3.Formulate a Solver model and find the optimal order quantity for the cotton sweaters.What is the optimal order? How much,if any,is the maximum backlog?

Question 23

Exhibit 12-1
An appliance store sells 500 units of a particular type of dishwasher each year.The demand for this product is essentially constant throughout the year.The store orders its products from a regional supplier,and it typically takes two weeks for the dishwashers to arrive after an order has been placed.Each time an order is placed,an ordering cost of $1000 is incurred.Each dishwasher costs the hardware store $300 and retails for $550.The store's annual cost of capital is estimated to be 7% per year.
Refer to Exhibit 12-1.Suppose there is a storage cost of $10 per unit.Make the appropriate change to your Solver model or EOQ formula,and find the optimal order quantity in that case.

Question 24

Exhibit 12-2
A moving company purchases large cardboard shipping boxes from a supplier.The company uses approximately 10,000 of these boxes for packing customers' belongings each year,and demand for the boxes is essentially constant throughout the year.The box supplier offers the following pricing schedule,based on the quantity of boxes ordered: The fixed cost of placing an order is $50,and the company's cost of capital is 7% per year.
Refer to Exhibit 12-2.Suppose there is a storage cost of $1 per unit.Make the appropriate change to your Solver model and find the optimal order quantity in that case.Does the unit purchasing price change?

Question 25

Exhibit 12-1
An appliance store sells 500 units of a particular type of dishwasher each year.The demand for this product is essentially constant throughout the year.The store orders its products from a regional supplier,and it typically takes two weeks for the dishwashers to arrive after an order has been placed.Each time an order is placed,an ordering cost of $1000 is incurred.Each dishwasher costs the hardware store $300 and retails for $550.The store's annual cost of capital is estimated to be 7% per year.
Refer to Exhibit 12-1.Assuming there are no storage costs,formulate a Solver model and find the optimal order quantity.

Question 26

Exhibit 12-3
The North Slope clothing store chain sells approximately 26,000 units of its most popular cotton sweater each year.North Slope buys these sweaters from a manufacturer located in Canada.The fixed cost of placing an order for this particular product is $200.North Slope pays $10 for each cotton sweater.The company's cost of capital is 11%,and the cost of storing a sweater for one year is $1.10.While North Slope prefers not to backlog customer demand,management of the company believes that it can afford to run out of sweaters on an occasional basis.The company estimates that the shortage cost per sweater per year is about $20.
Refer to Exhibit 12-3.Suppose the annual demand for the sweaters is not known with certainty,but rather is estimated to be normally distributed with mean 26,000 and standard deviation 2,000.Formulate a Solver model to find the optimal (R,Q)policy by minimizing the North Slope's expected annual cost.What is the policy,and what is the total annual cost?

Question 27

Exhibit 12-1
An appliance store sells 500 units of a particular type of dishwasher each year.The demand for this product is essentially constant throughout the year.The store orders its products from a regional supplier,and it typically takes two weeks for the dishwashers to arrive after an order has been placed.Each time an order is placed,an ordering cost of $1000 is incurred.Each dishwasher costs the hardware store $300 and retails for $550.The store's annual cost of capital is estimated to be 7% per year.
Refer to Exhibit 12-1.Check your answer from Solver using the economic order quantity (EOQ)formula.Do you get the same result? Show your work.

Question 28

Exhibit 12-2
A moving company purchases large cardboard shipping boxes from a supplier.The company uses approximately 10,000 of these boxes for packing customers' belongings each year,and demand for the boxes is essentially constant throughout the year.The box supplier offers the following pricing schedule,based on the quantity of boxes ordered: The fixed cost of placing an order is $50,and the company's cost of capital is 7% per year.
Refer to Exhibit 12-2.Assuming there are no storage costs,formulate a Solver model and find the optimal order quantity.

Question 29

Exhibit 12-3
The North Slope clothing store chain sells approximately 26,000 units of its most popular cotton sweater each year.North Slope buys these sweaters from a manufacturer located in Canada.The fixed cost of placing an order for this particular product is $200.North Slope pays $10 for each cotton sweater.The company's cost of capital is 11%,and the cost of storing a sweater for one year is $1.10.While North Slope prefers not to backlog customer demand,management of the company believes that it can afford to run out of sweaters on an occasional basis.The company estimates that the shortage cost per sweater per year is about $20.

-A bookstore chain often has to place orders for a wide variety of books.The setup cost for placing an order for copies of a particular hardcover book is $100,regardless of the size of the order.The unit cost per copy is $40.The head of the purchasing department of the bookstore estimates that the cost of holding a copy of this book in inventory for one week is $6.The text's inventory position at the beginning of any week is the number of copies in inventory plus any copies that have already been ordered but have not yet arrived.The reorder policy specifies that if the inventory (x)at the beginning of the week is less than or equal to R,exactly enough copies will be ordered to bring the inventory up to a set amount Q.Thus,the bookstore will order Q - x copies.Otherwise,if the inventory is greater than R,no order will be placed that week.If an order is placed,it will arrive after a lead time of 1,2,or 3 weeks with probabilities 0.65,0.25,and 0.10,respectively.The weekly demand for this book is uncertain,but it can be described by a normal distribution with mean 600 and standard deviation 150.The bookstore's policy is to satisfy all demand in the week it occurs.If weekly demand cannot be satisfied completely from on-hand inventory,then an emergency order will be placed at the end of the week for the shortage.This order will arrive virtually instantaneously (via express mail delivery),but at a much higher cost of $70.It is currently the beginning of week 1,and the current inventory of this hardcover book,including any copies that might have just arrived,is 1200.There are no other orders on the way.Simulate a range of (R,Q)ordering policies,from 400<R<1400 and 1000<Q<2500,and determine which one minimizes total cost over the next 52 weeks.

Question 30

Exhibit 12-3
The North Slope clothing store chain sells approximately 26,000 units of its most popular cotton sweater each year.North Slope buys these sweaters from a manufacturer located in Canada.The fixed cost of placing an order for this particular product is $200.North Slope pays $10 for each cotton sweater.The company's cost of capital is 11%,and the cost of storing a sweater for one year is $1.10.While North Slope prefers not to backlog customer demand,management of the company believes that it can afford to run out of sweaters on an occasional basis.The company estimates that the shortage cost per sweater per year is about $20.
Refer to Exhibit 12-3.Suppose again that the annual demand for the sweaters is not known with certainty,but rather is estimated to be normally distributed with mean 26,000 and standard deviation 2,000.However,this time,formulate a Solver model to find the optimal (R,Q)policy to ensure that at least 99% of customer demands are met with existing inventory.What is the policy,and what is the total annual cost in that case?