1) What trade-offs are involved in each of these aspects of inventory management?

a) Buying additional amounts to take advantage of quantity discounts.

Buying additional amounts to take advantage of quantity discounts: If a painter orders
200 gallons of water paints for $4.75 per gallon with all the factors remaining the
same, he would be on a positive side, if the supplier offers discounts on the purchase
of more quantity. The buyer would save on money on the total cost of water paints.
However, it may be possible that the higher supplier of water paints may get damaged
in transit or gets damaged in the warehouse. There can be various reasons that can
prove to be harmful to the buyer on ordering higher quantity of water paints. Hence,
in such a situation, the tradeoffs are the threats that can be faced by the buyer on the
purchase of water pains in large quantity and on the other hand saving some bucks in
the form of quantity discounts offered by the supplier.
b) Treating holding cost as a percentage of unit prices instead of as a constant
amount.
Treating holding cost as a percentage of unit prices instead as a constant amount: If
the unit price of the product increases, the holding cost will also hike. If one goes by
the Economic Order Quantity approach, one would be required to place smaller
orders, which would result in lesser inventory. On the other hand, if the holding cost
is constant, there would be no change in inventory decisions and the unit cost of the
product would remain the same. Hence, there no such trade-off in the first case, as
there is direct relationship between the holding cost and unit price of products. The
buyer is not gaining or losing in the buying process. Similarly, in the second
condition, no such trade off occurs.

2) When we discuss inventory management, we often emphasis the importance of

service level, which is typically defined as a percentage of customers demand that is
satisfied with inventory. In other words, managers would like to maintain certain
service level to prevent the shortage. Now think as a supermarket manager, how
would you go about evaluating the criticalness of an inventory shortage?
As a manager of a supermarket an individual can evaluate the criticalness of an inventory
shortage by evaluating how many customers visit the super market per day in average and
what is the average demand of customers that visit the market. This will give the
estimates of maintaining the required inventory in the super market.

3) (About lead time and safety stock)

A local ice cream shop, Sweet Cream Dairy, is known for its walnut fudge ice cream.
The shop manager Joe has estimated that demand for walnut fudge ice cream can be
approximated by a normal distribution with a mean of 21 gallons per week and a
standard deviation of 3.5 gallons per week. Joe would like to maintain a service level
of 90 percent. Lead time for this particular ice cream is about two days. With the
ownership change of the creamery, Joe feels that the lead time for this ice cream is
not as certain as before. He estimates that the standard deviation of the lead time is
about 1 day. Sweet Cream Dairy is open seven days a week. (Hint: work in terms of
weeks)
a) What is the safety stock that Joe has to keep to maintain the 90% service level?
Safety Stock = Z * Sigma
= 1.38 * 3.5
= 4.83 Gallons
b) If Joe works with the supplier and makes sure that walnut fudge ice cream will
always be delivered on time, how much safety stock can he reduce?
Safety Stock = Z * Sigma
= 1.38 * 3
= 4.14 Gallons
Reduction in Safety Stock = 4.83-4.14 = 0.69 Gallons
c) If Joe has adopted a Re-Order Point (ROP) model, what is the ROP for walnut
fudge ice cream? (consider the standard deviation of the lead time is 1 day)
1) Reorder Point = U + Z* Sigma
21 (1.38 * 3.5)
= 25.83
2) Reorder Point = U + Z* Sigma
= 21 + (1.38 * 3)

= 25.14
4) (About coefficient of variation)
Garden Variety Flower Shop (GVFS) would like to source locally to support local
small businesses. It uses about 750 12-inch clay pots a month. There are two
competingsuppliers, Awesome and Bravo, both offer relatively good price and
service. Due to the production capacity limitation, the monthly supply each supplier
can offer various and is listed in the following table.
a) GVFS would like to establish a stable sourcing relationship with one of the
supplier, based on the coefficient of variation analysis of the supply. Which
supplier should GVFS choose?
b) Besides COV value, what other factors GVFS should consider in selecting a
supplier?
Month
Jan
Feb
Mar
Apr
May
Jun

Supplier Awesome
3000
2000
2500
2500
2500
1000

Supplier Bravo
750
1200
900
200
900
1000

Answer:
The following trade-offs are involved in the cases explained below:
a)
GVFS would like to establish a stable sourcing relationship with one of the supplier based on the
coefficient of variation analysis of the supply.
First, compute the coefficient of variation for supplier awesome and supplier bravo thei conclude
based on outcome.
The coefficient of variation for supplier awesome and supplier bravo is,
By using MINITAB software, find coefficient of variation help with the following steps:
1) Import the data.
2) Select Display Descriptive Statistics from Bask Statistics in Stat menu.
3) Select Variables.

4) Select Coefficient of variation from Statistics option.

5) Click Ok.

Descriptive Statistics:

Supplier Awesome.

Supplier Bravo

Total
Variable

Count

CoefVar

Supplier Awesome

30.63

Supplier Bravo

41.24

From MINITAB output, the coefficient of variation for supplier awesome is 130.63 and supplier
bravo is 141.241
The supplier bravo should GVFS choose due to higher coefficient of variation which is 41.24
than supplier awesome coefficient of variation which is 30.63. .

b)
Besides coefficient of variation value, the standard deviation might be considers in selecting a
supplier.