Exercises for Managing Inventories

Question 1 (ABC Analysis)

PERMATAKASIH Hospital is considering using ABC analysis to classify laboratory SKUs into three categories:
those that will be delivered daily from their supplier (Class A items), those that will be controlled using a
continuous review system (B items), and those that will be held in a two-bin system (C items). The following table
shows the annual dollar usage for a sample of eight SKUs. Rank the SKUs, and assign them to their appropriate
category.

SKU Code Dollar Value Annual Usage

1 RM4.50 RM3150
2 RM1.00 RM30 000
3 RM0.55 RM61
4 RM1.50 RM225
5 RM0.20 RM13 500
6 RM0.90 RM315
7 RM0.02 RM2300
8 RM0.01 RM11

Answer
Percentage of Dollar
Rank SKU Code Usgae
1 2 61.15%
2 5 26.5%
3 1 6.42%
4 7 4.69%
5 6 0.64%
6 4 0.46%
7 3 0.12%
8 8 0.02%

Economic Order Quantity

Question 2

Bubble, Inc., buys 400 blank cassette tapes per month for use in producing foreign language courseware. The
ordering cost is $12.50. Holding cost is $0.12 per cassette per year.

a. How many tapes (EOQ) should Bubble, Inc., order at a time?

b. What is the time between orders?

Answers:

EOQ= 1000 tapes, time between orders = 0.2083 months or 2.5 months
Question 3

Leaky Pipe, a local retailer of plumbing supplies, faces demand for one of its SKUs at a constant rate of 30,000
units per year. It costs Leaky Pipe $10 to process an order to replenish stock and $1 per unit per year to carry
the item in stock. Stock is received 4 working days after an order is placed. No backordering is allowed. Assume
300 working days a year.

a. What is Leaky Pipe’s optimal order quantity?

b. What is the optimal number of orders per year?

c. What is the optimal interval (in working days) between orders?

d. What is the demand during the lead time?

e. What is the reorder point?

f. What is the inventory position immediately after an order has been placed?

Answers

a. EOQ = 775 units

b. Optimal number of orders = 38.7 or 39

c. Optimal interval between orders = 7.69 days

d. Demand during lead time = 400 units

e. Reorder point = 400 units

f. Inventory position = 1175 units

Question 4

At Dot Com, a large retailer of popular books, demand is constant at 20,400 books per year. The cost of placing
an order to replenish stock is $35, and the annual cost of holding is $6 per book. Stock is received 5 working
days after an order has been placed. No backordering is allowed. Assume 250 working days a year.

a. What is Dot Com’s optimal order quantity?

b. What is the optimal number of orders per year?

c. What is the optimal interval (in working days) between orders?

d. What is demand during the lead time?

Answers

a. optimal order quantity is 488 books

b. The optimal number of orders per year is 42 orders

c. The optimal interval (in working days) between orders is 6 days

d. The demand during the lead time is 1,224 books

e. The reorder point is 1,224 books

f. The inventory position immediately after an order has been placed is 1,712 books