Inventory Management Assignment

1. Harley-Davidson has its engine assembly plant in Milwaukee and its motorcycle assembly
plant in Pennsylvania. Engines are transported between both plants using trucks, with each
trip costing $1000. The motorcycle plant assembles and sells 300 motorcycles each day.
Each engine costs $500 and Harley incurs a holding cost of 20% per year.

a. How many engines should Harley load onto each truck?

b. What is the cycle inventory at Harley?
c. In an attempt to implement Just-In-time (JIT), Harley has decided to load 100
engines per truck, how much does the annual inventory cost get changed?
d. What should be the optimal cost of each truck for Harley, if only 100 engines are
loaded?

2. PreFab, a furniture manufacturer uses 20,000 square feet of plywood per month. Their
trucking company charges them $400 per shipment, independent of quantity purchased.
The manufacturer offers an all unit discount with a price of $1.00 for orders less than 20,000
feet, $0.98 for orders between 20,000 to 40,000 square feet and $0.96 for all orders greater
than 40,000 feet. PreFab incurs a holding cost of 20%.
a. What is the optimal order size for PreFab?
b. What is the annual cost of such a policy?
c. What is the cycle inventory of plywood at PreFab?
d. How does it compare with the cycle inventory if the manufacturer does not give a
quantity discount and sells all plywood at $0.96 per square foot?

3. The Orange Company has built a new music playing device called the J-Pod. The J-Pod is
sold through a major electronics retailer Good Buy. Good Buy has estimated the demand for
J-Pod as the following function:
Demand D: 20,00,000 – 2,000p; where p is the price of an individual J-Pod
The Product cost for Orange of one J-Pod is $100.
a. At what wholesale price should Orange sell J-Pod’s to Good Buy?
b. What will be the retail price that Good Buy will charge?
c. What are the profits for J-Pod & Good Buy at equilibrium?
d. If Orange decides to discount the wholesale price by $40, then how much discount
should Good Buy offer customers to maximise profit?
e. Orange decides a price of $550 per unit and Good Buy decides a Retail price of
$775, Good Buy incurs the ordering & shipping cost of $10,000 for each lot.
What will be the optimal lot size for Good Buy?

4. Weekly demand for Motorola cell phones at a Good Buy store is normally distributed with
a mean of 300 and a SD of 200. Motorola takes 2 weeks to supply a Good Buy order. Good
Buy is targeting a Cycle Service Level (CSL) of 95% and monitors its inventory continuously.
a. How much safety stock should a Good Buy Store carry?
b. What would its ROP be?
 c. If the manager of a store decides to order every 3 weeks, what should the safety
stock be to maintain CSL of 95%?
d. If store manager is targeting a fill rate of 99%, what should the store’s safety stock
be?

5. GAP has started selling through its online channel along with its retail stores.
Management has to decide which products to carry at the retail stores and which products
to carry at a central warehouse to be sold only via its online channel. GAP currently has 90
retail stores across United States. Weekly demand for size large khaki pants at each store is
normally distributed with a mean of 800 and a standard deviation of 100. Each pair of pants
costs $30. Weekly demand for purple cashmere sweaters at each store is normally
distributed with a mean of 50 and a standard deviation of 50. Each sweater costs $100. GAP
has a holding cost of 25%. Gap manages all inventories using a continuous review policy and
the supply lead time for both products is 4 weeks. The targeted CSL is 95%.
a. How much reduction in holding cost per unit sold can GAP expect on moving each
of the products from stores to online channels?
b. Which of the two products should GAP carry at the retail stores and which should
it carry at the central warehouse for online channel? Why?
Assume demand of one week to the next week be independent each other.

6. Orion is a global company that sells copiers. Orion currently sells 10 variants of a copier,
with all inventory kept in finished goods form. The primary component that differentiates
the copiers is printing subassembly. An Idea being discussed is to introduce commonality in
the printing subassembly so that final assembly can be postponed and inventories kept in
component form. Currently each copier costs $1000 in terms of components. Introducing
commonality in the print subassembly will increase component cost to $1025. One of the 10
copiers represents 80% of the total demand. Weekly demand for this variant is normally
distributed with a mean of 1000 and a standard deviation of 200. Each of the remaining 9
variants has a weekly demand of 28 with a standard deviation of 20. Orion aims to provide
95% level of service. Replenishment lead time for the components is 4 weeks. Copier
assembly can be completed in a matter of hours. Orion manages all inventories using a
continuous review policy and a holding cost of 20%.
a. How much safety inventory of each variant must Orion keep without component
commonality? What is the annual holding cost?
b. How much safety inventory must be kept in components form if Orion using
common components for all variants? What is the annual holding cost? What
is the increase in component cost using commonality? Is commonality
justified?
c. At what cost of commonality will it be justified?
d. Now consider the case in which Orion uses component commonality for only 9
low demand variants. How much reduction in safety inventory does Orion
achieve in this case? What are the savings in term of annual holding cost? Is
this restricted commonality justified?
e. At what cost of commonality will this new restriction be justified?