Homework 3 Operations Management
Homework 3 Operations Management
(C4P2, C4P7, ALPHA (C), C7P9, C7P12, C7P14, C7P17, C7P21, C7P26, C11P2, C11P5, C11P12, C11: Lear
Corporation)
C4P2:
A. What is the RPN for each failure cause?
M. 10 (5x2x1) N. 108 (3x4x9) X. 12 (2x2x3) Y. 42 (7x3x2) Z. 45 (9x1x5)
B. Which failure cause would be of least concern?
Failure cause M
C. Which failure cause would be of greatest concern?
Failure cause N
D. For the failure of greatest concern, would your recommended action be aimed at reducing failure
severity, occurrence, or undetectability? On what other information would your answer depend?
I would recommend reducing undetectability, because it has the highest value for cause N. It is also
important to know what the cost of reducing undetectability is in comparison with the costs of
reducing other factors such as severity and occurrence.
C4P7:
Document the steps that someone using the House of Quality procedure might follow in developing:
C7P9:
Ergonomics Inc. sells ergonomically designed office chairs. The company has the following
information: Average Demand = 20 units/day Average lead time = 30 days Item unit cost = $50
(orders less than 200 units) Item unit cost = $48 (orders of 200 or more) Ordering Cost = $25
Inventory carrying cost = 25% Business year= 250 days
The basic question: How many chairs should the firm order each time? Assume there is no
uncertainty at all about the demand or the lead time. There are many associated questions, such as
what will the firms average inventory be under each alternative? What will be the breakdown of
costs for each alternative?
2 DC D= annual demand, U = unit cost, Co = Order cost, Ci = inventory carrying cost
EOQ 0
UC
=> D= 20x250 = 5000, U = 50 (if order < 200); 48 (if order > = 200), Co = 25, Ci = 25%
i
EOQ at $50: 2 x 5000 x 25/ 50 x .25 = 250000/12.5 = 20000 -> 20000 = 141.42 -> 141 units
EOQ at $48: 2 x 5000 x 25/ 48 x .25 = 250000/12 = 20833.33 -> 20833.33 = 144.34 -> 200 units
TAC of ordering 141 units:
Annual ordering cost = 25(5000/141) = 886.52
Annual inventory carrying cost = 50 x .25 (141/2) = 881.25
Annual Product cost = 50 x 5000 = 250,000
Total Cost = $251,767.77
TAC of ordering 200 units:
Annual ordering cost = 25(5000/ 200) = 625
Annual inventory carrying cost = 48 x .25 (200/2) = 1,200
Annual Product cost = 48 x 5000 = 240,000
Total Cost = $241,825
The firm should order 200 chairs
C7P12:
Meyer Stores carries a specialty line of flavored syrup. One of the most popular of these is raspberry
syrup, which sells, on average, 30 bottles per week. Meyers cost is $8 per bottle. Meyer has
determined its order cost to be $50 and inventory carrying cost is 20 percent. Meyer is open for
business 52 weeks per year. What is the EOQ for raspberry syrup? If Meyer orders the EOQ quantity
each time, what will be the inventory turnover rate for raspberry syrup?
D= annual demand, U = unit cost, Co = Order cost, Ci = inventory carrying cost
D= 30 x 52 = 1560, U =8, Co= 50, Ci= .20
EOQ= 2 x 1560 x 50/ 8 x .20 = 156000/1.6 = 97500 97500= 312.25 -> 312
Inventory Turnover Rate= unit sales/ average inventory = 1560/ 312 = 5.0
C7P14:
Johnson Corporation has the following information about a product that it carries in stock:
Average Demand: 40 units/day Average Lead Time = 15 days Item unit cost = $55 (orders less than
400), $50 (orders of 400 or more) Ordering cost= $30 Inventory carrying cost = 20%
Business year = 300 days St. dev. Demand = 2.5 units St. dev. of lead time =1.5 days
Desired Service level = 97.5%
A. What it the total acquisition cost of ordering at the $55 price?
EOQ = 2 x 12000 x 30 / 55 x .2 = 720000/ 11 = 65454.55 65454.54 = 255.84 -> 256
Annual Ordering Cost = 30 (12000/256 ) = 1406.25
Annual Inventory Carrying Cost = 55 x .2 (256 /2) = 1408
Annual Product Cost = 55 x 12000 = 660,000
TAC = $662,814.25
B. What is the total acquisition cost of ordering at the $50 price?
EOQ = 2 x 12000 x 30 / 50 x .2 = 720000/ 10 = 72000 72000 = 286.33 -> 400
Annual Ordering Cost = 30 (12000/400 ) = 900
Annual Inventory Carrying Cost = 50 x .2 (400 /2) = 2000
Annual Product Cost = 50 x 12000 = 600,000
TAC = $602,900
C. What level of safety stock should Johnson maintain for this item?
ddlt = 15 (2.5^2) + (40^2)(1.5^2) = 93.75 + 3600 = 3693.75 -> 3693.75 = 60.78
SS = z (ddlt) = 2.5 (60.78) = 151.94
D. If Johnson chooses the ordering policy that results in the lowest total acquisition cost, and
maintains the safety stock level for 97.5% service, what will Johnsons average inventory be for this
item?
Average inventory = Q/2 + SS = 400/2 + 3.75 = 200 + 151.94 = 351.94 -> 352 units
E. What will annual inventory turnover rate be for this item?
Inventory turnover = unit sales/ average inventory = 12000/352 = 34.09 turns
F. What will the reorder point be for the item?
ROP = (d * t) + SS = (40 x 15) + 151.94 = 751.94 units
C7P17:
Freeport Corporation finds that demand for surfboards has average demand of 10 units per day, with
a standard deviation of 3 units. Lead time from the supplier averages 12 days, with a standard
deviation of 2 days. The item costs $50 and the inventory carrying cost is 30%.
A. Suppose management decides to offer a 95% service level; that is, it is willing to experience a
stockout probability of 5 percent during the order cycle. How much safety stock should be carried?
B. How much is the annual inventory carrying cost of the safety stock because of this decision?
C. You decide that you want this company to give better service to its customers. You decide that a
99% service level is appropriate. How much safety stock must be carried to offer this service level.
D. What is the additional inventory carrying cost that will be incurred on this item because of your
decision to increase the service level?
E. What will the reorder point be for the company if your decision is implemented?
C7P21:
Jaspers Grocery places an order for Monster every 3 weeks. Once the order is placed, delivery to the
store typically occurs in one week. Average demand is 100 cases per week and the standard deviation
of demand is 20 cases per week. The store policy is to stock an amount of inventory that allows for an
average stockout condition of 10 percent while waiting for replenishment. It is time to place an order,
and there are 420 cases on hand. How many units should be ordered?
C7P26:
You are the buyer for your university bookstore. One of the textbooks has a cost to you of $100 and
you sell it to students for $140. Any copies of the book that you order and do not sell to students can
be returned to the publisher for an average of $80 credit. (Sometimes you can get full credit, but
sometimes a new edition is published so you get no credit). In one particular course, demand has
averaged 400 books each semester, with a standard deviation of 40. What is your target service level?
What is your target order quantity for the course?
C11P2:
A. Suppose you have a package weighing 15 pounds that needs to be shipped to zone 5. The value of
material is $10,000 and the annual inventory holding rate is 40% of the product value. Which
transportation mode (air or ground) minimizes the total shipping and transit inventory cost?
Next day cost = $68.25 Ground (5 days) = $11.15
cost of carrying (next day) = 1 day/365 days ($10,000) (.4) = $10.96
Total cost (next day)= 68.25 + 10.96 = $79.21
cost of carrying (ground) = 5 days/ 365 days ($10,000)(.4) = $54.79
Total cost = 11.15 + 54.79 = $65.94
Ground shipping minimizes the total shipping and transit cost.
B. How high would the inventory holding rate have to be in order to justify next day air service?
79.21- 11.15 = 68.06 -> 5/365 (10,000) (x) = 68.06 -> (5/365)x = .006806 -> x = .497 = 49.7%
C11P5:
You are shipping 200 diamonds to a customer located 2,000 miles away. The average value of the
diamonds is $1,500. You can ship via air for $500 and the diamonds will arrive in two days or you can
ship via a specialty ground carrier for $200 and the diamonds will arrive in 6 days. You figure your
inventory carrying cost is 25%. Your customer will immediately transfer funds to your bank account on
the receipt of the shipment. What is your total cost if you use the ground carrier? The air carrier?
What other considerations are involved besides the cost?
Ground: $1,432.88
Air: $910.96
Other considerations involved besides cost are the availability of these modes of transportation,
customer desire for rapid delivery, and their dependability. If the customer wants the diamonds
delivered as soon as possible and to ensure their safety, air is probably the best option. Although
there are chances of delays, air transportation will probably deliver the diamonds more quickly with
less handling and chances of damaging these expensive items.
C11P12:
Using the center-of-gravity method, determine the latitude and
longitude of the best location for the distribution center. Use Google
Maps or some other resource to plot the location. Then suggest other
factors to recommend a location for the distribution center.