Chapter 12 Discuss The Concept Safety Stock Fixed order Quantity

Document Type
Test Prep
Book Title
OM 5 5th Edition
Authors
David Alan Collier, James R. Evans
OM5 C12
Test Bank
28. Because of demanding customers, organizations must always maintain a 100 percent service
level.
29. In general, total ordering costs are equal to total inventory-holding cost for the optimal
solution to the economic order quantity (EOQ) model.
30. In the fixed-period system, managers must make two key decisions: the time interval
between reviews and the replenishment level.
31. In a single-period inventory situation, the only inventory decision is when to trigger an
order.
32. The decision of how many fruit baskets to make for the holiday season would be analyzed
using a single-period inventory model.
Case Study Questions (To reward students who attend class, listen and learn, and take
good class notes on the case discussion and/or student team presentation.)
1. Bishop Manufacturing is implementing the economic order quantity (EOQ) inventory control
system, and they need a good estimate of the cost to process a purchase order (PO). It takes 5
total labor hours to process a PO. The average number of stock-keeping units (SKUs) on a PO
is 2.2. The average wage for people working in the purchasing department is $22 per hour, plus
employee benefits of $3 per hour. Fixed costs for the purchasing department are $250,000 per
year assuming a 2,000 hour per employee per year workweek. Given this information a good
estimate of the cost to order one SKU is _____.
a. $5.00
b. $56.82
c. $113.36
d. $125.00
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2. Hardy Hospital is implementing the economic order quantity (EOQ) inventory control
system, and they need a good cost estimate to process a purchase order (PO). It takes 4 total
labor hours to process a PO. The average number of stock-keeping units (SKUs) on a PO is 4.
The average wage for people working in the purchasing department is $22 per hour, plus
employee benefits of $3 per hour. Fixed costs for the purchasing department are $300,000 per
year assuming 2,000 hours per employee per year workweek. From the given information what
is a good estimate of order cost (Co) to use in the EOQ model?
a. Less than $10
b. More than $10 but less than or equal to $20
c. More than $20 but less than or equal to $30
d. More than $30 but less than or equal to $40
Problems for Manual Grading, Take-Home Exams and Partial Credit (Also, review the
OM Instructor’s Manual for end-of-chapter questions/problems)
1. What is inventory management and why is it important?
2. Explain the different types of inventories maintained throughout a value chain.
3. What are the four categories of inventory costs?
ANS:
OM5 C12
Test Bank
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4. Summarize the characteristics of the inventory environment that management considers when
developing an inventory management system.
5. Explain the difference between independent demand and dependent demand.
6. Discuss the two types of stockouts.
7. Explain the ABC inventory classification.
OM5 C12
Test Bank
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8. Define the economic order quantity (EOQ) model and explain its major assumptions.
9. Given the information below, conduct an ABC analysis and determine which items should be
classified as A, B, and C.
SKU
Annual Usage
Item Value ($)
A
2,800
0.22
B
300
50.00
C
275
11.00
D
700
8.00
E
45
400.00
F
1,250
0.80
G
2,000
0.60
ANS:
OM5 C12
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10. Given the information below, conduct an ABC analysis and suggest which items should be
classified as A, B, and C.
SKU
Annual Usage
Item Value ($)
1
9,000
80.00
2
12,000
58.80
3
24,000
76.20
4
42,000
48.00
5
55,000
30.00
6
140,000
2.20
7
33,000
48.00
8
3,000
110.00
11. Louisa, the owner of a garden supply store was wondering if she could manage the inventory
better. She has decided to develop an ABC classification system to help manage the inventory.
The company's inventory consists of the following items:
Garden Tool
Cost
Quarterly Demand (units)
Shovel
$ 5.00
1,000
Edger
$25.00
6
Weeder
$ 6.00
400
Hose
$20.00
800
Cutters
$ 4.00
100
Sprinkler
$ 7.00
800
Hedge Trimmer
$ 5.00
5,000
Spreader
$15.00
6
Sprayer
$12.00
20
OM5 C12
Test Bank
Clippers
$ 8.00
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a.
b.
c.
d.
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12. Explain the difference between a fixed-quantity system and a fixed-period system.
13. Jony furniture store examines its inventory policy and considers using an economic order
quantity (EOQ) approach. They have the following information about a table set:
Annual demand
3,920 sets
Current order quantity
80 sets
Carrying cost
$80.00/set/year
Order cost
$200
a.
What is the current total annual cost (TC)?
b.
What is the economic order quantity (EOQ)?
c.
What is the total annual cost at the economic
order quantity (EOQ)?
14. Delta Manufacturing is implementing an economic order quantity (EOQ) inventory control
system and needs a good estimate of the cost to process a purchase order (PO). It takes 6 total
labor hours to process a PO. The average number of SKUs on a PO is 4.2. The average wage for
people working in the purchasing department is $20 per hour, plus employee benefits of $4 per
hour. Fixed costs for the purchasing department are $350,000 per year assuming a 2,000 hour
OM5 C12
Test Bank
per employee per year workweek. Given this information, what is a good estimate of the cost to
process one stock-keeping unit (SKU)?
15. Discuss the concept of safety stock in a fixed-order quantity system with uncertain demand.
16. Using the data below, find the economic order quantity (EOQ), the total annual cost
associated with the economic order quantity, and the reorder point.
Annual Demand:
8,000 units
Weeks Operating:
52/year
Ordering Cost:
$35/order
Holding Cost:
$4/unit/year
Lead Time:
3 weeks
17. Using the data below, find the economic order quantity (EOQ), the total annual cost
associated with the economic order quantity, and the reorder point.
Annual Demand:
15,000 units
Weeks Operating:
52 weeks/year
Ordering Costs:
$60/order
Holding Costs:
$7/unit/year
Lead Time:
5 weeks
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18. A hotel purchases 8,000 gallons of a cleaning product. Each gallon costs $10, and the cost
of holding one gallon for a year is estimated to be $3. Ordering cost amounts to $30 per order.
a.
b.
c.
19. Keith, an operations manager at a chemical company is attempting to set a safety stock level
for a key ingredient that is used in their most powerful insecticide product. He believes that
demand during lead time for this ingredient is normally distributed based on past data. In
addition, he believes that future use is accurately depicted by these historical demands during
lead-time data (in gallons): 55, 75, 75, 70, 80, 60, 50, 70, 60, and 85. He estimates the standard
deviation of demand during the lead time to be 8.5 gallons.
a.
What is the average demand during the lead time for this key ingredient?
b.
What is the safety stock needed to provide a 95 percent service level?
c.
What is the reorder point the company should use?
20. James, the floor manager at a local store of a national home improvement chain evaluates
their inventory system. He chooses the patio blocks to be examined as the first item. The
historical supply and demand data for this item indicates a constant lead time of 16 days.
Demand per day (d) is normally distributed with a mean demand of 2000 per day and standard
deviation of 240 per day. He plans to set the service level at 90 percent during lead time.
a.
What is the average demand during lead time?
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b.
What is the amount of safety stock of blocks he
should keep on hand?
c.
What is the order point he should use?
21. Peterson Enterprises uses a fixed-order quantity inventory control system. The firm operates
50 weeks per year and has the following characteristics for an item:
Demand = 50,000 units/year
Ordering cost = $35/order
Holding cost = $2/unit/year
Lead time = 3 weeks
Standard deviation in weekly demand = 125 units
a.
b.
22. Maria opens an aquarium store in a lively shopping mall and finds business to be booming,
but she often stocks out of key items customers want. She decides to experiment with inventory
control methods such as using a fixed-order quantity (FQS) and/or fixed-order period (FPS)
systems. The Fluval 303 pump, a high margin and profitable pump, is one of her best sellers,
but it stocks out frequently. She collects the following details with respect to this pump's sales.
Demand = 10 units per week
Store operates 50 weeks/year
Order cost = $35/order
Lead time = 3 weeks
Item cost = $70/pump
Inventory-holding cost = 10% per year
a.
b.
c.
OM5 C12
Test Bank
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23. An auto parts store (operates 350 days per year) in a major metropolitan area reviews its
inventory on a periodic basis using a computer system. It is experiencing some problems with a
tune-up kit. The kit is bought from PRC Tires, a U.S. manufacturer. The annual demand for
these kits is 10,500. The cost to carry a kit in the inventory for one year is $4.90, and the cost to
place a replenishment order is $17 per order. Replenishment lead time is 4 days. The standard
deviation of daily demand is 7 kits.
a.
b.
c.
24. Jacob manages a candy store in a high traffic shopping mall. He has collected the following
information:
Weekly demand for small candy boxes = 100 boxes
Cost to place one purchase order with the box supplier = $15.80
Cost to hold one box for one year in inventory = $3.45
Lead time = 3 weeks
Weeks in a year = 52 weeks
Answer the next four questions based on the given data.
a.
b.
c.
OM5 C12
Test Bank
d.
25. Heather, manager of a large medical supply house that operates 45 weeks per year and 5
days per week, has decided to implement a fixed-period inventory system for all class A items.
One such item has the following characteristics:
Demand = 8,000 units/year
Order cost = $40/order
Holding cost = $4/unit/year
If Heather wishes to minimize total cost (thereby approximating the economic order quantity
(EOQ)), what should be T, the number of workdays between orders (i.e., review period)?
26. Illustrate the single-period inventory model with an example.
27. A bookstore must decide on how many calendars to order for the next year. Each calendar
costs $2 and is sold for $4.50. After January 1, any unsold calendars are returned to the
publisher for a refund of $0.75 each. The distribution of demand is uniform between 100 and
300. How many calendars should the bookstore order?
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28. A 4th of July celebration T-shirt for this year will cost festival organizers $12 each and will
sell for $25 on or before July 4. Any unsold T-shirts can usually be disposed at a discount after
the festival for $5 each. If demand is normally distributed with a mean of 1,800 T-shirts and a
standard deviation of 75, how many T-shirts should be ordered?
29. Christa, a merchant wants to stock Christmas trees. She can place only one order per season,
so she pays $30 for each tree that she buys and sells them for $80 each. She will incur an
additional cost of $6 each for unsold trees that must be hauled to the landfill. If the demand for
Christmas trees is normally distributed with a mean of 365 trees and a standard deviation of 46
trees, how many trees should she order?

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