# Service Management

## Quiz 18 :Managing Facilitating Goods

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How valid are the assumptions for the simple EOQ model ?
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Economic order quantity (EOQ) helps to minimize total inventory costs and total ordering costs of a firm. It provides customized recommendations of the quantity of inventory needed and when to order the inventory in terms of units per order.
There are several valid assumptions for a simple EOQ model as illustrated below:
•The required quantity of inventory of a period must be assumed to calculate EOQ.
•The quantities used to compute EOQ must be assumed to be constant for a given period of time.
•One other valid assumption to calculate simple EOQ is to consider marginal costs and to omit fixed costs.
•A valid assumption of a classic EOQ model also assumes to maintain constant demand rates with no stockouts. This is valid for dairy firms.
Using EOQ, a firm can obtain customer satisfaction through maintaining enough inventory.

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Monthly demand for an inventory item is a normally distributed random variable with a mean of 20 units and a variance of 4. Demand follows this distribution every month, 12 months a year. When inventory reaches a predetermined level, an order for replenishment is placed. The fixed ordering cost is $60 per order. The items cost$4 per unit, and the annual inventory holding cost is 25 percent of the average value of the inventory. The replenishment lead time is exactly 4 months. a. Determine the EOQ. b. Assume that a 10 percent "all units" discount will be given if the order quantity is greater than or equal to 100 units. What order quantity would you recommend with this offer? c. Determine the necessary reorder point and safety stock to achieve a 90 percent service level.
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(a)
(b)
(c)

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Books-to-Go, Inc., has a recurring problem of clearing its shelves of hardcover books once the publisher releases the paperback edition. These books take up shelf space, and the sales are slow. More important, however, they tie up capital with which to buy new bestsellers. Typically, hardcover bestsellers initially retail for $39.95 and have sales of approximately 30 per month during the introductory period. Once the paperback becomes available, hardcover sales plummet to approximately 3 per month. The mark-up on bestsellers is 50 percent of cost. a. If the paperback version sells for$12.95 and 15 hardbacks are in stock, recommend a discount price for the hardcover version. b. Explain why the discount price is not influenced by the number of hardcovers in stock.
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Company BO has a recurring issue to clear its shelves once its publisher releases new editions.
a)
Compute the lowest discount price as shown below:
Formula to calculate the lowest discount price as shown below:
….. (1)
Here,
The available data to solve the problem is as shown below:
Now, calculate the lowest discount price as shown below:
Substitute the values in equation (1) as shown below:
Hence, the lowest discount price is
b)
From the above calculations, it can be observed that the discount price is not influenced by number of hardcovers. This is because, the hard bags in stock were cancelled out in the calculation.

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The A M Hobby Shop carries a line of radio-controlled model racing cars. Demand for these cars is assumed to be a constant rate of 40 cars per month. The cars cost $60 each, and ordering costs are approximately$15 per order regardless of the order size. Inventory carrying costs are 20 percent annually. a. Determine the EOQ and total annual costs under the assumption that no back orders are permitted. b. Using a $45-per-unit-per-year backorder cost, determine the minimum cost inventory policy and total annual cost. c. What is the maximum number of days a customer would have to wait for a backorder under the policy in part b? Assume the hobby shop is open for business 300 days per year. d. Would you recommend a no-backorder or a backorder inventory policy for this product? Explain. e. If the lead time is 6 days, what is the reorder point in terms of on-hand inventory for both the no-backorder and the backorder inventory policies? Essay Answer: Tags Choose question tag Annual demand for the notebook binders that Ted's Stationery Shop sells is 10,000 units. Ted operates his business on a 200-workday year. The unit cost of a binder is$2, and the cost of placing an order with his supplier is $0.40. The cost of carrying a binder in stock for one year is 10 percent of its value a. What should the EOQ be? b. How many orders are placed per year? c. How many working days elapse between reorders? Essay Answer: Tags Choose question tag Deep Six Seafood, a restaurant that is open 360 days a year, specializes in fresh Maine lobsters at a cost of$10 each. Air freight charges have increased significantly, and it now costs Deep Six $48 to place an order. Because the lobsters are shipped live in a saltwater tub, the order cost is not affected by order sizes. The cost to keep a lobster alive until needed runs about$0.02 per day. The demand for lobsters during the 1-day lead time is as follows: a. Deep Six would like to reconsider its order size. What would you recommend as an EOQ ? b. The Maine distributor is willing to give Deep Six a $0.50 discount on each lobster if orders are placed in lots of 360 each. Should Deep Six accept this offer? c. If Deep Six insists on maintaining a safety stock of 2 lobsters, what is the service level? Essay Answer: Tags Choose question tag Discuss how information technology can help to create a competitive advantage through inventory management ? Essay Answer: Tags Choose question tag The daily demand for an item is distributed normally, with a mean of 5 and a variance of 2. The cost to place an order is$10, and the carrying charge per day is estimated at 10 percent of the inventory value. The supplier has offered the following purchase plan: a. Recommend an optimal order quantity that will minimize the total inventory costs of ordering and holding plus the purchase cost of the units. Although it is not necessary, you may assume 360 days a year. b. Determine the reorder point and safety stock that will achieve a 95 percent service level given a constant 2-day delivery lead time. Assume daily demand is an independent variable.
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H ow is a service level determined for most inventory items ?
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The Supermart Store is about to place an order for Valentine's Day candy. The candy can be bought for $1.40 per box, and it is sold for$2.90 per box up to Valentine's Day. After Valentine's Day, any remaining boxes are sold for $1.00 each. All surplus candy can be sold at this reduced price. Demand at the regular retail price is a random variable with the following discrete probability distribution: a. Determine the expected demand for boxes of candy at the regular retail price. b. Determine the optimal number of boxes to stock using the critical fractile approach. c. What is the expected profit for your order in part b? Essay Answer: Tags Choose question tag How would one find values for inventory management costs ? Essay Answer: Tags Choose question tag Service capacity (i.e., seats on an aircraft) has characteristics similar to inventories. What inventory model would apply ? Essay Answer: Tags Choose question tag Dutch Farms imports cheese by the case from Holland for distribution to its Texas retail outlets. During the year (360 days), Dutch Farms sells 1,080 cases of cheese. Because of spoilage, Dutch Farms estimates that it costs the firm$6 per year to store a case of cheese. The cost to place an order runs about $10. The desired service level is 98 percent. The demand for cheese during the 1-day lead time is shown below. a. Calculate the EOQ for Dutch Farms. b. How many cases should Dutch Farms hold as safety stock against stock outs? c. Dutch Farms owns a refrigerated warehouse with a capacity of 500 square feet. If each case of cheese requires 10 square feet and must be refrigerated, how much per year could Dutch Farms afford to spend on renting additional space? Essay Answer: Tags Choose question tag A popular item stocked by the Fair Deal Department Store has an annual demand of 600 units. The cost to purchase these units from the supplier is$20 per unit and $12 to prepare the purchase order. The annual inventory holding cost is 20 percent of the purchase cost. The manager tries to maintain the probability of stockout at 5 percent or less. Lead time demand is uniform, between 30 and 70 (i.e., the probability of lead time is 1/41 =.0244 for demand = 30, 31,... , 70). a. Calculate the EOQ. b. Calculate the reorder point. c. Calculate the safety stock. d. If we purchase 80 units or more, the unit purchase cost is reduced to$19. Calculate the EOQ for this quantity discount case.
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River City Cement Co. maintains an inventory of lime that is purchased from a local supplier. River City uses an average of 200,000 pounds of lime annually in its manufacturing operations (assume 50 operating weeks per year). The lime is purchased from the supplier at a cost of $0.10 per pound. The inventory holding cost is 30 percent of the average value of the inventory, and the cost of placing an order for replenishment is estimated to be$12 per order. a. Assume that River City orders 10,000 pounds of lime every time it places an order for replenishment. What is the average annual cost of maintaining the inventory? b. Determine the EOQ. If the forecast of annual demand is 10 percent less than actual, how much "extra" is River City paying annually because of an inaccurate forecast of demand (note that this means actual demand for lime averages 220,000 pounds)? c. Assume that the supplier offers River City a 10 percent "all units" discount if the order quantity is 13,000 pounds or more. Also, assume that annual demand for lime averages 200,000 pounds. What is the best order quantity?
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Discuss the functions of inventory for different organizations in the supply chain (i.e., manufacturing, suppliers, distributors, and retailers).
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Spanish Interiors imports ceramic floor tiles from Mexico with various patterns in anticipation of contractor needs. These tiles usually are ordered a year before delivery, and the production run for each tile pattern requires a separate setup. Therefore, the orders must be large to defray the setup cost. Because orders are made far in advance of customer needs, the company must guess what the contractors will like and order patterns in anticipation of these demands. Occasionally, tile patterns fall out of favor, and Spanish Interiors is stuck with slow-moving stock. The markup is 30 percent of the tile cost, and the inventory usually turns over about three times per year. There are two slow-moving tile patterns in stock that management estimates will take 2 years each to clear. The sunburst pattern currently retails for $0.70 per square and the saguaro cactus pattern for$1.05 per square. Calculate the lowest discount price for each pattern that will clear the stock quickly.
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Suppose the XYZ Company, which has an annual demand of 12,000 units per year, order cost of $25, and annual holding cost per unit of$0.50, decides to operate with a planned shortage inventory policy with the backorder cost estimated as $5 per unit per year. a. Determine the EOQ. b. Determine the maximum number of backorders. c. Determine the maximum inventory level. d. Determine the cycle time in workdays (assume 250 workdays per year). e. Determine the total inventory cost per year. Essay Answer: Tags Choose question tag The local distributor for Macho Heavy Beer is reconsidering its inventory policy now that only kegs will be sold. The sales forecast for next year (200 days) is 600 kegs. The cost to store a keg of Macho in a refrigerated warehouse is approximately$3 per year. Placing an order with the factory costs about $4. The demand for Macho during the 1-day lead time is a. Recommend an EOQ for Macho Heavy Beer. b. If orders are placed in carload lots of 200 kegs, the brewery is willing to give the local distributor a$0.25 discount on the wholesale price of each keg. Based on analysis of total variable inventory costs, is this offer attractive? c. What is the recommended safety stock if Macho decides on an 85 percent service level?