OPERATIONS MANAGEMENT (II) SLOT 5

MAX MARKS: 70 | TIME ALLOTTED: 2 HRS 15 MINUTES

--------------------------------------------------------------------------------------------------------------------[12 Marks] Question 1: Moon Pharmaceuticals, Inc.

Moon Pharmaceuticals, Inc., handles a variety of health and beauty aid products. A
particular hair conditioner product costs Moon Pharma $2.95 per unit. The annual
holding cost rate is 20 percent. Using an EOQ model, they determined that an order
quantity of 300 units should be used. The lead time to receive an order is one week, and
the demand is normally distributed with a mean of 150 units per week and a standard
deviation of 40 units per week.
a) [3 Marks] What is the reorder point if the firm is willing to tolerate a 1% chance
of a stockout during an order cycle?
b) [1 Mark] What safety stock and annual safety stock cost are associated with your
recommendation in part a?
c) [5 Marks] Moon is considering making a transition to a periodic review system in
an attempt to coordinate ordering of some of its products. The review period
would be 2 weeks and the delivery lead time would remain one week. What
target level would be needed to ensure that the risk of stockout does not change?
d) [3 Marks] As a manager of Moon Pharmaceuticals, Inc., would you choose
continuous review or periodic review? Justify your choice.

[20 Marks] Question 2: Sitara Bazar

Mansukhbhai Patel heads one of the Sitara Bazar (SB) retail outlets in Karnavati. Of late,
he finds himself in a situation where inventory levels are excessive. After a series of
brainstorming meetings with his troubleshooters Munnabhai and Circuit (his WIMWI
juniors), a policy decision was taken to identify and then salvage the obsolete and slow
moving items. Salvaging can be done by selling at a deep discount to another retail
chain. During this exercise they noticed that SB also held excessive levels of fast-moving
items. Item #45 is a typical example.

This item (#45) has a known and constant annual demand of 10000 units. It costs Rs.
200/unit while the salvage price is Rs. 150/unit. The ordering cost is Rs. 100 per order,
and the holding cost fraction is 0.25. Currently, there are 20000 units in inventory (i.e. 2years of supply!).
Mansukhbhai, Munnabhai and Circuit are now involved in yet another round of
brainstorming session. Circuit is at his usual best and is of the opinion that it is better to
leave the inventory untouched and bump-off the purchase manager straight away for
his overzealous purchasing practices. Mansukhbhai, who always flashes his WIMWI
tag and rank, is of the opinion that they should stick to classroom basics and simply use
EOQ values. Any stock more than that should be salvaged.
a) [3.5 Marks] Graphically compare Mansukhbhais policy on inventory of Item #45
with that of Circuits
b) [6.5 Marks] Identify different elements of tradeoff involved. If you have to choose
between Circuits and Mansukhbhais policies, which one would you choose?
Justify
c) [10 Marks] Munnabhai doesnt agree with Circuit and Mansukhbhai and feels
that their policies are suboptimal. Do you agree with him? If so, provide an
optimal plan. If not, provide both qualitative and quantitative justifications for
your conclusion

[38 Marks] Question 3 Production Planning for Garma Garam

Surajmal Agarwal owns and operates a small factory specialising in winter garments.
He sells the woolen sweaters under the Garma garam brand name in northern India.
His planning process starts in August when he embarks on a tour of small towns and
cities to fathom the amount of woolen garments lying with the distributors from the
previous winter and also to generate a forecast for the demand for sweaters in the
coming months. The sales forecast for the winter of 2002-03 is shown in Table 1. The
knitting machines at his factory are operated by skilled workers who do not need any
additional training for working on the knitting machines. In the small town of
Hoshiarpur where the factory is situated, not more than 10 skilled operators are
available. Hence Surajmal has to frequently fall back on semi-skilled operators who
need to be trained for 3 days before they can start working. Due to considerations of

availability of machines and working space, the maximum number of workers that
Surajmal can employ is 18. Surajmal generally runs the factory from September to
February for a duration of 8 hours each day. He does not allow workers to avail of
overtime for more than 4 hours per day. There are a few small village cooperatives,
which have their own knitting machines. Surajmal has the option of subcontrating work
out to them. The operational details and cost estimates are provided in Table 2.
a) [10 Marks] Surajmal wants the factory to be run at a minimum constant
production rate such that there is no stockout. Generate the aggregate production
plan and the resultant cost estimate.

b) [24 Marks] A cold wave sweeps through the whole of northern India. As a result,
the demand for woolen garments has deviated significantly from the sales
estimate. The actual demand is provided in Table 3 while the new sales estimate
is provided in Table 4. The fraction of demand that Surajmal has not been able to
service can be considered as backordered. Consider that today is 1st December
2002. Generate an aggregate production plan to meet the new sales estimate.

c) [4 Marks] Calculate the total cost for the plan proposed by you in (b)
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