Tutorial 8

Supply Chain Engineering

Question 1
• DoorRed Pharmacy replenishes one of its best-selling drugs using a
continuous review policy. Daily demand for the drug is normally
distributed, with a mean of 300 and a standard deviation of 100. The
wholesale can process a replenishment request in two days. The
current replenishment policy is to order 1,500 units when there are
750 units on hand.
• What is the cycle service level that DoorRed achieve with its policy?
Solution
•  ss = ROP – = 750 – 300(2) = 750-600 = 150
• = = (100) = 141.42
• CSL = F( + ss, , )
• F(750, 600, 141.42) = 85.56%
• NORMDIST (ss/ , 0,1,1) = 85.56%
• You can use Z table or Excel, whatever you prefer
Question 2
• Toyota has decided to set up regional warehouses where some variants of the Scion
will be customized and shipped to dealers on demand. Customizing and shipping on
demand will raise production and transportation cost per car by $100. Each car costs
$20,000, and Toyota has a holding cost of 20 percent. Cars at the dealer are owned by
Toyota for the first 90 days. Thus, for all practical purposes, Toyota owns all inventory,
whether at the dealers or at the regional warehouse. Consider a region with 5 large
dealers and 30 small dealers. Toyota has partitioned the variants into two groups –
popular variants and uncommon variants. Weekly demand for the two types of
variants in the two types of dealers is in shown in Table 12-7. The goal is to provide a
95 percent cycle service level using a continuous review policy. Replenishment lead
times for both dealers and regional warehouses are four weeks. Customization and
shipping from a regional warehouse to a dealer can be done in a day, and this time can
be ignored. Assume demand to be independent across all dealers.
Question 2 cont.

• a) How much safety inventory of a popular variant is required at a

large or small dealer?
• b) What is the safety inventory required if inventory for the popular
variant (for small dealers ONLY) is centralized at the regional
warehouse by Toyota?
Solution
•  a)Popular Variant at Large Dealer:
• Decentralized:
• ss (at each large dealer) =(CSL) x = (0.95) x (15) = 49.35
• ss (across all large dealers) = (5)(49.35) = 246.73

Popular Variant at Small Dealer:

• Decentralized:
• ss (at each small dealer) (CSL) x = (0.95) x (5) = 16.45
• ss (across all small dealers) = (30)(16.45) = 493.46
Solution cont.
•  b) Popular Variant only Small Dealer Inventories Centralized:
• Demand per period = demand at small dealers = (10)(30) = 300
• Standard deviation of demand per period = = 27.39
• ss (at regional warehouse) (CSL) x = (0.95) x (27.39) = 90.09
• reduction in safety inventory from small dealer centralization = 493.46 –
90.09 = 403.36
• holding cost savings per year = (403.36)(20000)(0.2) = $1,613,440