Inventory
Critical Thinking Exercises
1. To be competitive, many fast-food chains began to expand their menus to include a wider
range of foods. Although contributing to competitiveness, this has added to the complexity
of operations, including inventory management. Specifically, in what ways does the
expansion of menu offerings create problems for inventory management?
2. As a supermarket manager, how would you go about evaluating the criticalness of an
inventory shortage?
3. Sam is at the post office to mail a package. After he pays for mailing the package, the clerk
asks if he would like to buy some stamps. Sam pauses to think before he answers. He doesn't
have a credit card with him. After paying for the package, he has about $30 in his pocket.
Analyze this from an inventory standpoint. Identify the relevant considerations.
4. Give two examples of unethical conduct involving inventory management and the ethical
principle each one violates
Exercises
1. A manager receives a forecast for next year. Demand is projected to be 600 units for the first
half of the year and 900 units for the second half. The monthly holding cost is $2 per unit,
and it costs an estimated $55 to process an order.
a. Assuming that monthly demand will be level during each of the six-month periods
covered by the forecast (e.g., 100 per month for each of the first six months), determine
an order size that will minimize the sum of ordering and carrying costs for each of the
six-month periods.
b. Why is it important to be able to assume that demand will be level during each six-
month period?
c. If the vendor is willing to offer a discount of $10 per order for ordering in
multiples of 50 units (e.g., 50, 100, 150), would you advise the manager to take
advantage of the offer in either period? If so, what order size would you recommend?
2. A food processor uses approximately 27,000 glass jars a month for its fruit juice product.
Because of storage limitations, a lot size of 4,000 jars has been used. Monthly holding cost is
18 cents per jar, and reordering cost is $60 per order. The company operates an average of 20
days a month.
a. What penalty is the company incurring by its present order size?
b. The manager would prefer ordering 10 times each month but would have to justify
any change in order size. One possibility is to simplify order processing to reduce the
ordering cost. What ordering cost would enable the manager to justify ordering every
other day (i.e., 10 times a month)?
3. A company is about to begin production of a new product. The manager of the department
that will produce one of the components for the product wants to know how often the
machine used to produce the item will be available for other work. The machine will produce
the item at a rate of 200 units a day. Eighty units will be used daily in assembling the final
product. Assembly will take place five days a week, 50 weeks a year. The manager estimates
that it will take almost a full day to get the machine ready for a production run, at a cost of
$300. Inventory holding costs will be $10 a year.
a. What run quantity should be used to minimize total annual costs?
b. How many days does it take to produce the optimal run quantity?
c. What is the average amount of inventory?
d. If the manager wants to run another job between runs of this item, and needs a
minimum of 10 days per cycle for the other work, will there be enough time?
e. Given your answer to part d, the manager wants to explore options that will allow this
other job to be performed using this equipment. Name three options the manager can
consider.
4. A company will begin stocking remote control devices. Expected monthly demand is 800
units. The controllers can be purchased from either supplier A or supplier B. Their price lists are
as follows:
Ordering cost is $35 and annual holding cost is 25 percent of unit price per unit. Which
supplier should be used and what order quantity is optimal if the intent is to minimize total
annual costs?
5. The demand for a type of inventory during the order period is as follows:
Demand 50 60 70 80 90 100 110
Frequency of 3 9 13 30 24 10 11
occurrence
(number of
times)
Holding cost: 25,000 VND/unit/year
Shortage cost: 19,000 VND/unit/year
Number of orders in a year: n= 7 times
Determine the reorder point for this type of inventory.
