OM5 C12 IM
15.* The J&B Card Shop sells calendars featuring a different Colonial picture for each
month. The once-a-year order for each year’s calendar arrives in September. From
past experience the September-to-July demand for the calendars can be approximated
by a normal distribution with µ = 300 and standard deviation = 20. The calendars
cost $4.50 each, and J&B sells them for $10 each.
a. Suppose that J&B throws out all unsold calendars at the end of July. Using
marginal economic analysis, how many calendars should be ordered? [Hint: note
that for a normal distribution, the value of Q* in Equation 12.17 can be found
using Appendix A. Find the value of z that corresponds to the cumulative
probability defined by Equation 12.17, and then find Q* by converting back to
the original normal distribution using the formula z = (Q* – )/
Using Equation 12.10, P(Demand Q*) = 5.50/(5.50+4.50) = 0.55. The z value
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OM5 C12 IM
b. If J&B sells any surplus calendars for $1 at the end of July and can sell all of
them at this price, how many calendars should be ordered?
Using Equation 12.10, P(Demand Q*) = 5.50/(5.50 + 3.50) = 0.61. The z-value
Teaching Note for Hardy Hospital Case Study
Overview
A university and university hospital’s materials management systems are interdependent
and neither is under control. The ordering and inventory control system experienced
stock outs on some items, excessive inventory on other items, multiple stocking points
throughout the hospital and university with no assigned process or inventory item owner,
used a paper-based system, and an array of different types of regular and special orders.
Originally the purpose of processing some hospital orders through the university system
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was to qualify for price breaks and lower total costs to the university. Inventory in the
hospital was stocked at one central stocking point, 31 hospital departments, and 215
secondary stocking points. Deliveries were made daily to the central storeroom and the
31 departments. Orders for less than $800 did not go through the regular ordering
processes. Real hospital data is provided in the case on one SKUs that is assumed to be
representative of all SKUs. Given these data the Director of Materials Management
wanted to evaluate if formal inventory control methods and systems could make a
difference.
Case Questions and Brief Answers
(1) What are good estimates of order cost and inventory holding cost?
(See Excel Model)
Ask an accounting major to develop these costs in class. The topic of what types
Comment: This is the first time many students are not “given” these parameter
Also, the EOQ model is a marginal cost model that requires information per SKU,
(2) What is the EOQ and reorder point for Strike Disinfectant given your answer to
Question 1?
)05.21)($224(,
)00.15)($52)(63.11(2(
2
h
o
C
DC
EOQ
= 62 gallons
Ch = I*C = (.224)($21.05) = $4.715
See Excel Model – Some students will define the SKU in terms of cases. An
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OM5 C12 IM
6.443.213.232)1.88(8.02) (11.63)2
L
zdLR
45 gallons
(3) Compute the total order and inventory holding costs for the Q and r system and
compare to their current order Q’s.
Total savings if adopt EOQ versus using the current Q = $224.67. The
(4) What are your final recommendations? Explain. Justify.
Typical recommendations (not in any particular order) include:
This materials management system is totally out of CONTROL!
The current paper based system is incredibly SLOW (not responsive to
real world and hospital needs).
Conduct a system wide inventory audit and clean out obsolete SKUs,
update on-hand quantities, and try to improve “data integrity.”
How can they keep the state bidding system from being by-passed?
Change state system so a team (committee) reviews each order request and/or
improve the processes speed of delivery, etc.
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OM5 C12 IM
analysis, cycle counting, FQS, FPS, and so on. Students will recommend FQS
for most SKUs.
Reevaluate key buying and stocking processes making use of Chapter 7
and 10 concepts and tools to find bottlenecks, improve processing time,
flowchart work flow, etc. UNDERSTAND WORK AND ORDER FLOW
(flowchart, study).
Especially for undergraduate students they will identify few of the “managerial
issues or ways to improve”—they simply do not have the experience—you will
Teaching Plan
The case is about Control versus Cost versus Service versus Liability. Ask your
students, what if the hospital stock out of a SKU and hurts a patient or if the patient dies
due to lack of inventory? Answer the four case questions with special emphasis on
getting good estimates of order and inventory holding costs.
You might begin class posing this question? Who approves what in this materials
management system? (Regular, emergency, special purchase orders). Another fun way
to begin class is to ask each (or a few) team(s) or student(s) what they used for estimates
of inventory-carrying and order costs, and what their EOQ were for Strike Disinfectant.
If you write this information on the board students see why quality (data integrity) inputs
to the EOQ is a first step to making good inventory decisions. Their answers will be in a
wide range with very different EOQs, of course, and that is the first major lesson of this
case!
You can also draw on the board a supply chain for the university and hospital if you want.
(FYI – When we grade this case we normally allocate Q#1 – 4 points, Q#2 – 3, Q#3 – 3
points, and Q#4 – 5 points for a total of x out of 15 points. (Estimates, graphs, supply
chain diagrams, and Excel models are extra credit.)
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OM5 C12 IM
Hardy Hospital Case Study OM5 C12
Order Costs Inventory Holding Cost
3 labor hours per
Order cost/SKU = $15.00
Average Value Inventory =
Holding Cost as % of Total Inv.=
Cost of Capital Funds (Bonds) =
Inv. Hold Cost as % of Item =
Cost (I)
Strike Disinfectant
Current Order Quantity 200
Weeks/Year 52
Item Value ($84.20/4 Gallons) $21.05 per gallon
Inv. % 0.2242
Cycle Service Level 97.00%
Z-Value 1.88
Leadtime demand 23.3
Safety Stock 21.3
Reorder Point 44.6 gallons
Current Q = 200 gallons
Order Cost $45.36
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If you cover FPS
Fixed Period System (T and M)
Optional Topic (Do not recommend covering except for advanced courses
and students but FYI; req’ds additional
readings)
EOQ 62.00
Safety Stock 21.3
Q/2 + SS 52.32
No. Stock Points Gallons $ Ave Inv
1 52 $1,101
2 74 $1,558
3 91 $1,908
Note: 231 is 215 secondary pts + 24 depts. + hospital storeroom + university storeroom
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