Exercises lecture

Chapter 12
1. Henry Crouch’s law office has traditionally ordered ink refills 60 units at a time. The firm estimates that
annual carrying cost is 40% of the $10 unit cost and that annual demand is about 240 units per year.
The assumptions of the basic EOQ model are thought to apply. For what value of ordering cost would
its action be optimal?
2. Marilyn Hart is the purchasing agent for Central Valve Company, which sells industrial valves and
fluid-control devices. One of Central’s most popular valves is the Western, which has an annual
demand of 4000 units. The cost of each valve is $90, and the inventory carrying cost is $0.75 per
month. Marilyn has made a study of the costs involved in placing an order for any of the valves that
Central stocks, and she has concluded that the average ordering cost is $25 per order. Furthermore, it
takes about 5 working days for an order to arrive from the supplier.
a) What is the economic order quantity?
b) What is the average inventory if the economic order quantity is used?
c) What is the optimal number of orders per year?
d) What is the optimal number of days between any two orders, assuming 250 working days per year?
e) What is the total annual inventory cost (carrying + order cost)?
f) What is the reorder point?

3. Based on available information, lead-time demand for printers averages 6 units (normally distributed),
with a standard deviation of 0.5 printers. Management wants at least a 99.5% service level. What is the
appropriate safety stock?

4. Gainsville stocks products that have variable lead times because of the difficulty in importing the
products. Lead time is normally distributed with an average of 6 weeks and a standard deviation of 2
weeks. Demand is also variable and normally distributed with a mean of 200 products per week and a
standard deviation of 25 products. For a 90% service level, what is the safety stock?

1
Appendix 1: Normal curve areas
To find the area under the normal curve, you can apply the table below. You must know how
many standard deviations that point is to the right of the mean. Then, the area under the
normal curve can be read directly from the normal table.

.00 .01 .02 .03 .04 .05 .06 .07 .08 .09
0.0 0.50000 0.50399 0.50798 0.51197 0.51595 0.51994 0.52392 0.52790 0.53188 0.53586
0.1 0.53983 0.54380 0.54776 0.55172 0.55567 0.55962 0.56356 0.56749 0.57142 0.57535
0.2 0.57926 0.58317 0.58706 0.59095 0.59483 0.59871 0.60257 0.60642 0.61026 0.61409
0.3 0.61791 0.62172 0.62552 0.62930 0.63307 0.63683 0.64058 0.64431 0.64803 0.65173
0.4 0.65542 0.65910 0.66276 0.66640 0.67003 0.67364 0.67724 0.68082 0.68439 0.68793
0.5 0.69146 0.69497 0.69847 0.70194 0.70540 0.70884 0.71226 0.71566 0.71904 0.72240
0.6 0.72575 0.72907 0.73237 0.73565 0.73891 0.74215 0.74537 0.74857 0.75175 0.75490
0.7 0.75804 0.76115 0.76424 0.76730 0.77035 0.77337 0.77637 0.77935 0.78230 0.78524
0.8 0.78814 0.79103 0.79389 0.79673 0.79955 0.80234 0.80511 0.80785 0.81057 0.81327
0.9 0.81594 0.81859 0.82121 0.82381 0.82639 0.82894 0.83147 0.83398 0.83646 0.83891
1.0 0.84134 0.84375 0.84614 0.84849 0.85083 0.85314 0.85543 0.85769 0.85993 0.86214
1.1 0.86433 0.86650 0.86864 0.87076 0.87286 0.87493 0.87698 0.87900 0.88100 0.88298
1.2 0.88493 0.88686 0.88877 0.89065 0.89251 0.89435 0.89617 0.89796 0.89973 0.90147
1.3 0.90320 0.90490 0.90658 0.90824 0.90988 0.91149 0.91309 0.91466 0.91621 0.91774
1.4 0.91924 0.92073 0.92220 0.92364 0.92507 0.92647 0.92785 0.92922 0.93056 0.93189
1.5 0.93319 0.93448 0.93574 0.93699 0.93822 0.93943 0.94062 0.94179 0.94295 0.94408
1.6 0.94520 0.94630 0.94738 0.94845 0.94950 0.95053 0.95154 0.95254 0.95352 0.95449
1.7 0.95543 0.95637 0.95728 0.95818 0.95907 0.95994 0.96080 0.96164 0.96246 0.96327
1.8 0.96407 0.96485 0.96562 0.96638 0.96712 0.96784 0.96856 0.96926 0.96995 0.97062
1.9 0.97128 0.97193 0.97257 0.97320 0.97381 0.97441 0.97500 0.97558 0.97615 0.97670
2.0 0.97725 0.97778 0.97831 0.97882 0.97932 0.97982 0.98030 0.98077 0.98124 0.98169
2.1 0.98214 0.98257 0.98300 0.98341 0.98382 0.98422 0.98461 0.98500 0.98537 0.98574
2.2 0.98610 0.98645 0.98679 0.98713 0.98745 0.98778 0.98809 0.98840 0.98870 0.98899
2.3 0.98928 0.98956 0.98983 0.99010 0.99036 0.99061 0.99086 0.99111 0.99134 0.99158
2.4 0.99180 0.99202 0.99224 0.99245 0.99266 0.99286 0.99305 0.99324 0.99343 0.99361
2.5 0.99379 0.99396 0.99413 0.99430 0.99446 0.99461 0.99477 0.99492 0.99506 0.99520
2.6 0.99534 0.99547 0.99560 0.99573 0.99585 0.99598 0.99609 0.99621 0.99632 0.99643
2.7 0.99653 0.99664 0.99674 0.99683 0.99693 0.99702 0.99711 0.99720 0.99728 0.99736
2.8 0.99744 0.99752 0.99760 0.99767 0.99774 0.99781 0.99788 0.99795 0.99801 0.99807
2.9 0.99813 0.99819 0.99825 0.99831 0.99836 0.99841 0.99846 0.99851 0.99856 0.99861
3.0 0.99865 0.99869 0.99874 0.99878 0.99882 0.99886 0.99889 0.99893 0.99896 0.99900
Appendix 3: a few formulas

M/M/1 formulas POQ formulas

λ
Probabilistic models
Wq =
μ(μ − λ) 2
ROP = d ⋅ L + Z L ⋅ σ 2d + d ⋅ σ 2LT
k +1
⎛λ⎞
Pn > k = ⎜⎜ ⎟⎟
⎝μ⎠
Learning curves
M/D/1 formulas log rate
TN = T1 ( N b ) , where b =
log 2
λ(2μ − λ)
LS =
2μ(μ − λ )

2μ − λ
WS =
2μ(μ − λ )

λ2
Lq =
2μ(μ − λ)

λ
Wq =
2μ(μ − λ)

EOQ formulas
D Q
TC = S+ H
Q 2

2 DS
Q∗ =
H