Exam 12: Inventory Models

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?

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?

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

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

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

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.

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.

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

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

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