# 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

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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

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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

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Clippers

$ 8.00

15

a.

Compute the total dollar value of each of the ten inventory items. What is the total value

of all the inventory items?

b.

Which items should be declared "A" items? What percentage of total inventory value

does "A" group represent? What percentage of the total number of inventory items does

"A" group represent?

c.

Which items should be declared "B" items? What percentage of total inventory value

does "B" group represent? What percentage of the total number of inventory items does

"B" group represent?

d.

Which items should be declared "C" items? What percentage of total inventory value

does "C" group represent? What percentage of the total number of inventory items does

"C" group represent?

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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.

If the hotel orders in lots of 500 gallons, how many orders does it place each year?

b.

What are the ordering and holding costs, and total annual cost?

c.

If the economic ordering quantity is used, how much improvement in cost will result?

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.

What is the economic order quantity (EOQ) for this item?

b.

If Peterson wishes to provide a 90 percent cycle service level, what is the reorder point

with safety stock?

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.

What is the economic order quantity (EOQ) rounded to the next highest number?

b.

If the current order quantity used by Maria is 25 pumps per order, how much money can

she save annually by adopting an economic order quantity (EOQ) ordering policy?

c.

If Maria decides to use an FPS, what is the economic fixed-order interval?

OM5 C12

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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.

What should be the review period for these tune-up kits?

b.

What is the optimal replenishment level without safety stock?

c.

What is the optimal replenishment level with safety stock, assuming a 95 percent service

level?

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.

What is the economic order quantity (EOQ)?

b.

What is the average inventory level (i.e., cycle inventory)?

c.

What is the total annual order and inventory-holding cost?

OM5 C12

Test Bank

d.

If a fixed-period system (FPS) is adopted, what is the replenishment level (M) without

safety stock?

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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