1. Department of Information, Operations and Management Sciences Supply Chain Management and Purchasing – B2

Case study 1: Inventory management: EOQ and SS

Part 1

You are hired by a company to help review its industrial organization. It is a craft company that has not changed its organization for a long time and its CEO thinks it is important to establish some very simple production management ideas.
Below is the operating account for year N and a division of the costs (as a percentage) based on observations during the previous periods and on the existing documents of various services related to these services:

Costs	K€	Procurement	Storage	Production
Purchasing of material	1 500	0%	0%	100%
Various purchases (water, electricity, paper...)	200	5%	5%	90%
Costs related to staff	3 000	5%	2.5%	92.5%
Other charges (maintenance...)	300	30%	20%	50%
Taxes	400	10%	10%	80%
Depreciation	600	10%	10%	80%

Our study focuses on two products:

• . Product A, bought at an average price of 11.67€ and consumed regularly by production at a rate of 100 units per day.

• . Product B, bought at an average price of 3€ and consumed regularly by production at a rate of 1 000 units per day. The average total value of the     articles in stock is:

• . 815 K€ for year N-1

• . 820 K€ for year N
  The company works 200 days per year.
  The accountant makes an average of five orders a day to different suppliers of the company.

Questions

1. 1. Calculate the economic order quantity for product A. (The parameters to answer this question are to be calculated based on the data provided. Hint: make use of the percentages in the table.)

2. 2. Calculate the number of possible production days with this quantity.

3. 3. Calculate the economic order quantity for product B.

4. 4. Calculate the different costs for product B related to the following

Part 2

replenishment policies:

• .Purchase by lots of 1 000 pieces

• .Purchase by lots of 3 000 pieces

• .Purchase by lots of 5 000 pieces

Weekly demand for HP printers at a Sam's Club store is normally distributed, with a mean of 250. The standard deviation of the demand during the lead time is equal to 120. The store manager continuously monitors inventory and currently orders 1 000 printers each time the inventory drops to 600 printers. HP currently takes two weeks to fill an order.

Questions

5. 5. How much safety stock does the store carry?

6. 6. What service level does Sam's Club achieve because of this policy?

7. 7. How much safety inventory should Sam's Club carry if it wants to

   provide a service level of 95 percent?

8. 8. How does the required safety inventory change as the standard deviation of de demand during the lead time is reduced from 120 to 0 in intervals of 40?

Answer rating: 100% (QA)

1 The economic order quantity for product A is 5000 units 2 The number of possible production days w... View the full answer