Inventory management
# 1. Central Hydraulic Supply
The Central Hydraulic Supply Company is a distributor of hydraulic supplies in the Midwest. Central handles standard fittings, tubing, and similar items. Generally Central carries an entire product line for each manufacturer it represents providing local stock for rapid delivery to customers. The parts that Central stocks are mainly used in the maintenance of large construction equipment. The company operates 52 weeks per year.
Central has grown from a small two-person operation to a $75-million per year business in a si of 25 years. From its inception Central has been a profitable business in sound financial condition. Despite the continued growth of profits in absolute terms, however, Central found that profits as a percentage of sales have declined. When management became aware of the seriousness of the problem, it was decided to undertake a thorough review of policies and procedures in the area of inventory management.
One of the first items the company reviewed was the cost of preparing and processing a requisition, preparing a purchase order, and making necessary record changes. This was estimated to be $50 per order.
One of the typical items of inventory analyzed in detail was a small hydraulic fitting. Central sells about 20,500 of these fittings per year (the fitting is purchases for $14 and sells for $19). The manufacturer from whom Central buys the fitting does not offer any quantity discount. The manufacturer is located about 1,500 miles away and the fittings are shipped to Central by truck. They all arrive at once.
The annual per unit inventory holding cost is 20% of the item's value.
A) What is the order quantity that minimizes total annual cost of inventory (TAC)? What is the minimum TAC?
B) Suppose that the supplier of the fittings only has the capacity to deliver the fittings at the rate of 500 per week. Recalculate the optimum order quantity and the minimum TAC.
C) Suppose the supplier were to offer the following quantity discounts:
Quantity Ordered Price per fitting
1,000 to 1,999 $13.85
2.000 or more $13.70
The supplier is capable of delivering all the fittings order at once (instantaneous replenishment). Recalculate the optimum quantity and the minimum TAC.
# 2. Thompson Supply
The Thompson Supply company provides a full range of products for industrial construction. Thompson buys the product from its manufacturer and then resells the product to construction companies. Its products are readily replaceable, and so a stockout typically results in a lost sales. Through its history, Thompson has maintained a reputation for having things in stock. It was often the first sourcing choice of its customers because they could rely on Thompson to have what was needed. The store is open 6 days per week.
One particular type of fastener experienced fairly steady demand of 27 units per day with a standard deviation of daily demand of 5 units. The lead time for delivery is 6 days.
a) Suppose Thompson uses a reorder point of 170 units. What is the implied cycle service level?
b) Thompson decides the reorder point of 170 is insufficient. They want to achieve a 98% cycle service level with this item. What should the reorder point be?
c) Thompson has another item that sells 1,200 units every week, with a standard deviation of weekly demand of 150 units. The lead time for this item is 3 days. To achieve a 98.5% cycle service level, what should the reorder point be?
d) A third item is ordered 26 times per year (i.e. it has 26 inventory cycles per year - it gets ordered every two weeks). It has a 97% cycle service level. What is the likelihood that Thompson will stockout of this item at least once over the course of the year?
# 1. Central Hydraulic Supply
The Central Hydraulic Supply Company is a distributor of hydraulic supplies in the Midwest. Central handles standard fittings, tubing, and similar items. Generally Central carries an entire product line for each manufacturer it represents providing local stock for rapid delivery to customers. The parts that Central stocks are mainly used in the maintenance of large construction equipment. The company operates 52 weeks per year.
Central has grown from a small two-person operation to a $75-million per year business in a si of 25 years. From its inception Central has been a profitable business in sound financial condition. Despite the continued growth of profits in absolute terms, however, Central found that profits as a percentage of sales have declined. When management became aware of the seriousness of the problem, it was decided to undertake a thorough review of policies and procedures in the area of inventory management.
One of the first items the company reviewed was the cost of preparing and processing a requisition, preparing a purchase order, and making necessary record changes. This was estimated to be $50 per order.
One of the typical items of inventory analyzed in detail was a small hydraulic fitting. Central sells about 20,500 of these fittings per year (the fitting is purchases for $14 and sells for $19). The manufacturer from whom Central buys the fitting does not offer any quantity discount. The manufacturer is located about 1,500 miles away and the fittings are shipped to Central by truck. They all arrive at once.
The annual per unit inventory holding cost is 20% of the item's value.
A) What is the order quantity that minimizes total annual cost of inventory (TAC)? What is the minimum TAC?
B) Suppose that the supplier of the fittings only has the capacity to deliver the fittings at the rate of 500 per week. Recalculate the optimum order quantity and the minimum TAC.
C) Suppose the supplier were to offer the following quantity discounts:
Quantity Ordered Price per fitting
1,000 to 1,999 $13.85
2.000 or more $13.70
The supplier is capable of delivering all the fittings order at once (instantaneous replenishment). Recalculate the optimum quantity and the minimum TAC.
# 2. Thompson Supply
The Thompson Supply company provides a full range of products for industrial construction. Thompson buys the product from its manufacturer and then resells the product to construction companies. Its products are readily replaceable, and so a stockout typically results in a lost sales. Through its history, Thompson has maintained a reputation for having things in stock. It was often the first sourcing choice of its customers because they could rely on Thompson to have what was needed. The store is open 6 days per week.
One particular type of fastener experienced fairly steady demand of 27 units per day with a standard deviation of daily demand of 5 units. The lead time for delivery is 6 days.
a) Suppose Thompson uses a reorder point of 170 units. What is the implied cycle service level?
b) Thompson decides the reorder point of 170 is insufficient. They want to achieve a 98% cycle service level with this item. What should the reorder point be?
c) Thompson has another item that sells 1,200 units every week, with a standard deviation of weekly demand of 150 units. The lead time for this item is 3 days. To achieve a 98.5% cycle service level, what should the reorder point be?
d) A third item is ordered 26 times per year (i.e. it has 26 inventory cycles per year - it gets ordered every two weeks). It has a 97% cycle service level. What is the likelihood that Thompson will stockout of this item at least once over the course of the year?
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