Team 27 Nick Armstrong, Evan Mohl, Shreeraj Pawar, Sydney Sarachan Confederated Pulp and Paper Case Write

Up For the question, we determined that we would need to find the appropriate service level first. Then, that service level, combined with information in exhibit 1 to derive demand, would give us the appropriate block pile at the start of the winter. We started with the basic service level equation

Cs, or the cost of being short in inventory, was calculated as the difference between the cost of cutting the wood and what the farmers charged. The farmers charged $65. For the cost of supplying wood, we added the unit cost of $47.50 with $8.00 of shipping (since every piece of timber is shipped). We debated whether to add the $2 holding charge, but since every piece of wood would be held in the winter we included it. Thus, Cs =$65-($47.50+$8+$2). In order to calculate, Ce, we used this equation.

However, we quickly realized we did not have Q, or the total ordering and holding cost per period. So we used the Q equation We determined lamda as 4800/week, which was given in the case. We converted this to a yearly total, dividing by 52 and getting 92.3. We assumed the case numbers were given in a per year basis as often times they cited annual

numbers. Since S is the supply cost, we simply used $47.50 + $8.00 for $55.50. For H, we employed the formula H = ic +v. These were all supplied in the case (v=23, i=20% and c=$2). Eventually we calculated Q. We then could solve the Ce equation.

This gave us all the variables needed for the service level equation.

To then determine at what service level we would find the optimal stocking level for winter, we created a demand frequency table (see below) from the historical data given in Exhibit 1. We figured that the difference each year between the pile in the fall and the pile in the spring replicated demand, since thats what was sold. We then arranged each year by demand and calculated the cumulative probability. The place where optimal service leveled equaled cumulative probability would give us the amount to pile up in the winter. Because the .585 service level falls between the cumulative probabilities of 0.5 and 0.66, we want to stock up to ensure we cover the service level. As a result, we chose the 1982-83 year with a demand of 88,000. So, the company should be sure to pile up 88,000 units of the timber in the winter.

Frequency Demand table

Year Pile: Fall Pile: Spring Difference Re-ordered Difference Probability Cumulative Probability

1982-83 1983-84 1984-85 1985-86 1986-87 1987-88

100 100 125 113 110 110

12 a 40 27 5 28

88 112 85 86 105 82

82 85 86 88 105 112

0.1666666 0.1666666 0.1666666 0.1666666 0.1666666 0.1666666

0.1666666 0.333333 0.5 0.666666 0.833333 1.0