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OM5 Chapter 12: Managing Inventories
Discussion Questions
1. Discuss some of the issues that a small pizza restaurant might face in inventory
management. Would a pizza restaurant use a fixed order quantity or period system for fresh
dough (purchased from a bakery on contract)? What would be the advantages and
disadvantages of each in this situation?
A pizza restaurant must maintain inventories of dough, toppings, sauce, and cheese, and
other supplies such as boxes, napkins, cups, and so on. Because many of these items are
perishable, careful decisions must be made on the quantities to purchase. The perish ability
A FPS might be most appropriate for dough so that frequent orders (T) increase inventory to
the replenishment level (M). Coupled with higher safety stock levels for a FPS than a FQS,
the risk of running out (stockout) of dough is low. However, varying order sizes might be
2. List some products in your personal or family “inventory.” How do you manage them? (For
instance, do you constantly run to the store for milk? Do you throw out a lot of milk because
of spoilage?) How might the ideas in this chapter change your way of managing these
SKUs?
Any food items, printer ink cartridges, audio and video tapes, yard supplies such as
fertilizer, pencils and pens, gasoline for a lawnmower and/or automobile, clothes for laundry
3. Does the EOQ increase or decrease if estimates of setup (order) costs include fixed,
semi-variable, and pure variable costs while inventory-holding costs includes only pure
variable costs? Vice versa? What are the implications? Explain.
Because the EOQ model only depends on the order quantity, fixed costs associated with any
ordering or inventory holding are irrelevant (in accounting language, sunk costs). From an
Q*=2DC
o
¢
C
h
The C0/Ch ratio represents the cost structure of the business. If C0 is estimated using
If OM managers ignore these cost accounting issues and do not get good estimates of C0 and
Ch, major errors can be made in inventory levels. For example, if C0 is estimated on a full
cost basis while Ch is on a pure variable cost basis, the EOQs will be too large. Marketing
will like this and will seldom stock out but finance needs more funds to finance inventory.
4. Find two examples of using RFID technology to monitor and control SKUs and explain the
advantages and disadvantages of adopting such technology.
The SKUs might be livestock, pallets, medicine, surgery instruments in a hospital, retail
store items, identifying counterfeit brands, and parts and sub assemblies in a factory.
5. Identify at least two other practical examples of a single period inventory model different
from those in the book.
The book cites examples for Christmas trees, perishable food such as dough, fruit, fashion
and seasonal clothing items, and newspapers. Students will provide examples of one time
Problems and Activities
Note: an asterisk denotes problems for which an Excel spreadsheet template on the CourseMate
Web site may be used.
1. Find, describe, and draw an organization’s supply chain and identify the types of inventory
in it and if possible, there purpose and how it is monitored and controlled. (The example
could be a place you worked such as a call center, restaurant, factory, retail store, hotel,
school, or medical office.)
Students will try to draw a supply chain using the framework of the input-output model in
Exhibit 2.1, the pre- and postproduction model of defined in Exhibit 2.3 or the hierarchical
2. Interview a manager at a local business about his or her inventory and
materials-management system, and prepare a report summarizing its approaches. Does the
system use any formal models? Why or why not? How does the manager determine
inventory-related costs?
Like many OM issues, many firms, especially small firms, do not take systematic
approaches to decisions. This question can help students understand how inventory
management decisions are made and also to identify potential opportunities for
improvements. You can pose questions such as (a) Does the business specify service
3.* The Welsh Corporation uses 13 key components in one of its manufacturing plants. The data
are provided in the worksheet C12P3 in the OM5 Data Workbook. Perform an ABC
analysis. Explain your decisions and logic.
Use the Excel template ABC:
One possible ABC classification scheme is A items (WC397, WC008, WC971, WC413)
with 31% of items accounting for about 76% of total inventory value; B items (WC713,
4.* Perform an ABC analysis for the data provided in worksheet C12P4 in the OM5 Data
Workbook. Clearly explain why you classified items as A, B, or C.
This ABC analysis profile is not as clear cut as the previous problem #3. One might argue
that since the first three items (25% of items) account for almost 50% of the total dollar
A items are 25% of total items and 50% of total inventory value
5.* Perform an ABC analysis for the data provided in worksheet C12P5 in the OM5 Data
Workbook. Clearly explain why you classified items as A, B, or C.
Using the ABC spreadsheet template, we have the results shown below. We might classify
A items are 30% of total items and 68% of total inventory value
6.* MamaMia’s Pizza purchases its pizza delivery boxes from a printing supplier. MamaMia’s
delivers on-average 225 pizzas each month (assume deterministic demand). Boxes cost 23
cents each, and each order costs $12.50 to process. Because of limited storage space, the
manager wants to charge inventory holding at 25 percent of the cost. The lead time is 7 days,
and the restaurant is open 360 days per year, assuming 30 days per month. Determine the
economic order quantity, reorder point assuming no safety stock, number of orders per year,
and total annual cost.
)23(.25.0
50.12)12)(225(22
h
o
C
DC
EOQ
= 1083.47 or 1084 boxes
The cost of storing one box in inventory for the year, denoted by Ch, is given by Ch = I*C = .
25*.23 = .0575 cents/year.
The Excel template EOQ Model can be used as shown next.
Reorder point is one week’s demand or (225 boxes/month)/(30 days/month) = 7.5 boxes/day
Order decision rule: Place a new order for 1084 boxes when the inventory position drops to
Number orders/year = Annual Demand/EOQ = 2700/1084 = 2.5 (explain to students this is
Using Equation 12.6, total annual cost is
7.* Refer to the situation in Problem 6. Suppose the manager of MamaMia’s current order
quantity is 300 boxes. How much can be saved by adopting an EOQ versus their current Q =
300?
If Q = 300 boxes then it costs $58.83 ($121.13 – $62.30) MORE to implement the current
The EOQ spreadsheet template may also be used to find the total cost associated with any
8.* Super K Beverage Company distributes a soft drink that has a constant annual demand rate of
4,600 cases. A 12-pack case of the soft drink costs Super K $2.25. Ordering costs are $20 per
order, and inventory-holding costs are charged at 25 percent of the cost per unit. There are
250 working days per year, and the lead time is four days. Find the economic order quantity
and total annual cost, and compute the reorder point.
EOQ =2DC
o
C
h
=2(4600)10
(2.25)(.25)
= 572 cases
Reorder point is four days’ demand or (4600/250)(4) = 73.6 or 74 cases. Note the problem
