Case Problem 3

Josh Stevens: Case Project #3
Case Project #3: Inventory

Management- Nightingale Drugstore
MS 5023: Decision Analysis and Production
Management
Due: April 18, 2016
Joshua Stevens
Student ID: @01099386
Part (a). Inventory Policy- Basic EOQ Model

Using the data provided in the scenario including sample cost data (expenses and
sale amounts), demand data, and the values of the material items, the summary
of the pertinent data in the formation of our EOQ model is:
Demand/ Month= 250 toothbrushes
Demand/ Year= 250 x 12= 3000 toothbrushes/ year (assuming 360 days/
year)
D = 3000 toothbrushes/year
Wholesale price (cost to Nightingale drugstore) = $1.25/ toothbrush
C = 1.25/toothbrush
Cost of Ordering= (20 min/ 60 min in one hour) * $18.75 hourly salary=
$6.25/order
C = 6.25/order
Carrying Cost= 0.12 holding cost * 1.25 cost/unit= $0.15/toothbrush per
year
Cc = 0.15/toothbrush-year
Using the information provided in the scenario related to Nightingale Drugstore,
we will make the following assumptions/restrictions + decisions in the formation
of our model:
1.) Our inventory management system for this model will utilize a continuous
(fixed- order) quantity system; order will be placed for same constant
amount when the inventory decreases to a specific determined amount (the
reorder point). The fixed amount is called the economic order quantity
(EOQ).
2.) We will be selling one product, toothbrushes.
3.) The demand is known with certainty (at 3000 toothbrushes per 360-day
year); this demand will continue indefinitely for the purpose of this model.
4.) The lead time (annotated as L below) for the receipt of orders is constant.
5.) The order quantity (annotated as Qopt below) is the same for each order.
6.) The order quantity is received instantaneously (Robert makes this decision
because it only takes a couple hours for the order to arrive after the order is
placed).
7.) No shortages are allowed.
8.) No joint orders are allowed.
9.) All costs are deterministic (constant and known).
We will use the following graphs/ formulas when setting up our model:
Because ordering is instantaneous, the lead time, L is 0. This also means that
the reorder point, R is also 0. This can be concluded because R=dL, where d=
0
demand per time period (in years for this example) and L= 0 days OR 360
years.
L= 0 days
d= 3000 toothbrushes/ year
0
R= = L ( years ) d ( per year ) = 360 3,000 = 0 toothbrushes

(irrelevant in this example)
In determining optimal order quantity, Qopt, we use the following formula:
Qopt =
2 C x D
Cc
2 6.25 x 3000
0.15
= 500 toothbrushes/ order
The **optimal policy** is that 500 toothbrushes should be ordered when the
inventory level reaches zero (since ordering is considered instantaneous in this
example).
This would mean that the number of orders/ year would be:
# orders/year (or cycles/year) =
D
Q opt
3000
500
= 6.00
cycles/year
The time between orders would be:
Time between orders =
Q opt
D
500
= 3000
= 0.16667 years =
60.00 days= 8.57 weeks

The annual carrying/holding cost would be:
Q
opt
Annual carrying/holding cost = C c 2
500
= 0.15 2
$37.50
The annual ordering cost would be:
D
Annual ordering cost = C o Qopt
3000
= 6.25 500
= $37.50
Represented by graph, in this Basic EOQ model, the total annual variable
inventory cost can be represented by:
The calculation of the total variable inventory cost would be:
Total annual variable inventory cost = annual carrying cost

+ annual ordering cost =
(C c
Qopt
) +
2
(C o
D
)
Qopt
= 37.50 + 37.50
= $75.00
The results can also be solved by using Microsoft Excel. See attached Part (a)
excel spreadsheet. Done in Excel or solved using arithmetic, the final answers are
the same:
The optimal inventory policy is that 500 toothbrushes should be

ordered whenever the current inventory level drops to zero (because
of the assumption that orders are instantaneous; we can wait till
inventory is zero). Robert should order these 500 toothbrushes
every 8.57 weeks; this would mean that a total of 6 orders would get
placed each year (assuming the year is 360 days long). Using this
inventory policy, the total variable inventory cost is $75.00 per year.
Part (b). EOQ Model with Non-Instantaneous

Receipt
We will continue to use the same data as in part (a), including sample cost data
(expenses and sale amounts), demand data, and the values of the material items.
We will change the lead time to 6 days. The summary of the pertinent data
remains the same:
D= Demand/ year = 3000 toothbrushes/year

C = Wholesale price/ cost to Nightingale Drugstore =
1.25/toothbrush
C = Cost of Ordering = 6.25/order
Cc = Carrying cost = 0.15/toothbrush-year
For part (b), we will make the following assumptions/restrictions + decisions in
the formation of our model:
1.) Our inventory management system for this model will continue to utilize a
continuous (fixed- order) quantity system; order will be placed for same
constant amount when the inventory decreases to a specific determined
amount (the reorder point). The fixed amount is called the economic order
quantity (EOQ).
4.) The lead time (annotated as L below) for the receipt of orders is constant
at 6 days for the purpose of this model (non-instantaneous).
We will continue to use the following graphs/ formulas when setting up our model:
In this example, the lead time, L, (provided to us) is 6 days. This also means that
the reorder point, R would equal 50. This can be concluded because R=dL,
where d= demand per time period (in years for this example) and L= 6 days OR
6
360 years.
L= 6 days =
6
360
years

6
R= = L ( years ) d ( per year ) = 360 3,000 = 50.00 toothbrushes

In determining optimal order quantity, Qopt, we continue to use the following
formula:
Qopt =
2 C x D
Cc
2 6.25 x 3000
0.15
The **optimal policy** is that 500 toothbrushes should be ordered when the
inventory level reaches 50 units (toothbrushes); this will allow 6 days of lead
time for the warehouse located 350 miles away from Nightingale Drugstore to
prepare/ ship/ deliver the toothbrushes.
The number of orders/ year would remain the same:
D
# orders/year (or cycles/year) = Q opt
3000
500
= 6.00
cycles/year
The time between orders would remain the same:
Q opt
D
500
= 3000
= 0.16667 years =
60.00 days= 8.57 weeks

The annual carrying/holding cost would remain the same:
Q
500
= 0.15 2
opt
$37.50
The annual ordering cost would remain the same:
D
3000
= 6.25 500
= $37.50
The total variable inventory cost would remain the same:

+ annual ordering cost =
(C c
Qopt
) +
2
(C o
D
)
Qopt
= 37.50 + 37.50
= $75.00
The results can also be solved by making adjustments to the problem in Microsoft
Excel. See attached Part (b) excel spreadsheet. Done in Excel or solved using
arithmetic, the final answers are the same:
The optimal inventory policy is that 500 toothbrushes should be

ordered whenever the current inventory level drops to 50 units
(toothbrushes); this gives a lead time of 6 days for replenishment
inventory to be prepared/ shipped/ delivered to Nightingale drugstore
from the warehouse located 350 miles away. We are assuming that
demand will remain constant, so Robert would continue to order these

500 toothbrushes when the inventory reaches 50 units
(toothbrushes). He will still order every 8.57 weeks (with demand held
constant; his first replenishment order will just be a slight bit earlier
than in part (a). Using this inventory policy, the total variable
inventory cost will also remain constant at $75.00 per year.
Part (c). EOQ Model with Planned Shortages

We will continue to use the same data as in part (a) and part (b), including sample
cost data (expenses and sale amounts), demand data, the values of the material
items, and the lead time of 6 days. The summary of this data remains the same:

1.25/toothbrush
L= 6 days =
6
360
years
Cs= Cost of Shortage= 1.50/toothbrush-year

The graphical portrayal of our EOQ model with planned shortages will look like
this:
For part (c), we will make the following assumptions/restrictions + decisions in the
formation of our model:
quantity (EOQ).

4.) The lead time (annotated as L below) for the receipt of orders is constant
at 6 days.
6.) Shortages are allowed.
Qopt =
Cc +C s
2 C x D
Cc
Cs
2 6.25 x 3000
0.15+ 1.50
0.15
1.50
= 500 x
1.0488 = 524.40 toothbrushes/ order

We will then solve to get the maximum shortage level, Sopt, by using the
following formula:
Cc
Sopt = C c +C s Qopt =
0.15
524.40
0.15+ 1.50
= 47.673 toothbrushes
We will calculate the maximum inventory level by subtracting maximum shortage

from Qopt:
Max. inventory level = Qopt S opt = 524.40- 47.682 = 476.718

toothbrushes
The reorder point (without accounting for shortages), R, will stay the same:
6
R = L ( years ) D( per year ) = 360 3,000
The reorder point (accounting for shortages), Rs, can be calculated by

subtracting the maximum shortage amount from R:
Rs = RS opt = 50.00- 47.673 = 2.327 toothbrushes
The annual carrying/holding costs will be:
Annual carrying cost =
opt Sopt
Q
Cc
= 0.15
(524.447.682)
2(524.4)
0.15
(476.718)
1048.8
= $32.503
The annual ordering costs will be:

D
3000
= 6.25 524.4
= $35.755
The total annual shortage costs will be:

2
Annual shortage cost =

1.5
Cs
( S opt )
2(Q opt )
(47.673)2
1.5
=
2(524.4)
2272.715
1048.8 = $3.25
The total variable inventory cost will be:

+ annual ordering cost + annual shortage costs =
32.503+35.755+3.25 = $71.508
The results can also be solved by making adjustments to the problem in Microsoft
Excel. See attached Part (c) excel spreadsheet. Whether computed in Microsoft
Excel or using arithmetic, the final answers are the same:
Because of Roberts desire to allow planned shortages to occur, the

optimal inventory policy is to allow the optimum shortage level of
47.673 toothbrushes to maximize profit. We would probably use a
shortage level of 47 toothbrushes (as its obviously impossible to have
a portion of a toothbrush); we would know that customers would still
be willing to wait for toothbrushes despite this wait. We would still
make a profit despite Roberts estimated shortage loss (dissatisfied
customers, loss of customer goodwill, etc.) of $1.50 per unit short per
year.
Robert would place an order for 524.40 toothbrushes (would likely
order 524 for rounding purposes) when the available inventory level
reaches 2.327 toothbrushes (would likely order toothbrushes when
inventory levels reach 3 because MAXIMUM shortage is 2.327 units
under this policy). The annual total variable cost of the inventory
would drop from $75.00/ year to $71.51/ year under this inventory
policy.
Part (d). EOQ Model with Planned Shortages:

Range of Shortage Costs
In this portion, we will use many of the same calculations from part (c). We will
analyze the impact of the lowest per-unit cost of shortage ($0.85) and
subsequently calculate the impact of the highest cost of per-unit shortage cost
($25.00) provided by Robert. Both of these will have a substantially different
impact on which inventory policy to use (with shortage or without) and the total
variable inventory cost per year. The following calculations are also calculated in
Microsoft Excel (Part (d)-i and Part (d)-ii), which is obviously much easier to utilize
for plugging numbers into the varying potential per-unit shortage costs. This
data remains the same for the purpose of Part (d):

1.25/toothbrush
L= 6 days =
6
360
years
Cs= Cost of Shortage= 1.50/toothbrush-year

For part (d), the following assumptions/restrictions + decisions remain the same
(as in part (c) above) in the formation of our model:

quantity (EOQ).
4.) The lead time (annotated as L) for the receipt of orders is constant at 6
days.
6.) Shortages are allowed.
Part (d)-i. Using the lowest per-unit shortage cost (0.85)

Qopt =
Cc +C s
2 C x D
Cc
Cs
2 6.25 x 3000
0.15+ 0.85
0.15
0.85
= 500 x

following formula:
Cc
Sopt = C c +C s Qopt =
0.15
542.326
0.15+ 0.85
= 81.349
toothbrushes
from Qopt:
Max. inventory level = Qopt S opt = 542.326- 81.349 =

460.977 toothbrushes
The reorder point (without accounting for shortages), R, stays the same:
R=
L ( years ) D( per year )
6
3,000
360

Rs = RS opt = 50.00- 81.349 = (-31.349) toothbrushes

opt Sopt
Q
Cc
= 0.15
(542.34681.349)2
2(542.346)
0.15
(460.997)
1084.692
= $29.389

D
3000
= 6.25 542.346
= $34.572

0.85
Cs
( S opt )2
2(Q opt )
( 81.349)
= 0.85 2(542.346)
6617.66
1084.692 = $5.186

29.389+34.572+5.186 = $69.147
The above results can be solved (more easily) by making adjustments to the
problem in Microsoft Excel. See attached Part (d)-i excel spreadsheet. Whether
computed in Microsoft Excel or using arithmetic, the answers are the same.
Part (d)-ii. Using the highest per-unit shortage cost (25.00)

Qopt =
Cc +C s
2 C x D
Cc
Cs
2 6.25 x 3000
0.15+ 25
0.15
25
= 500 x

following formula:
Sopt =
Cc
Qopt
C c +C s
0.15
501.5
0.15+ 25

from Qopt:
Max. inventory level = Qopt S opt = 501.5- 2.991 = 498.509

toothbrushes
The reorder point (without accounting for shortages), R, stays the same:
6
R = L ( years ) D( per year ) = 360 3,000

Rs = RS opt = 50.00- 2.991 = 47.009 toothbrushes

0.15
(498.509)
1003
= $37.165
opt Sopt
Q
Cc
= 0.15
(501.52.991)
2(501.5)
Annual ordering cost =
Co
D
Qopt
3000
= 6.25 501.5
= $37.388
( S opt )2
Cs
2(Q opt )
( 2.991)
= 25 2(501.5)
8.946
= 25 1003
= $0.223

37.165+37.388+0.223 = $74.776
The above results can be solved (more easily) by making adjustments to the
problem in Microsoft Excel. See attached Part (d)-ii excel spreadsheet. Whether
computed in Microsoft Excel or using arithmetic, the answers are the same.
Part (d). Conclusion: Range of per-unit shortage cost ($0.85 $25.00)

If the per-unit shortage cost was $0.85, the maximum shortage level
would be 81.35 toothbrushes, the reorder point would be (-31.35)
toothbrushes, the order amount would be 542.33 toothbrushes, and
the total annual variable inventory cost would be the lowest at $69.15
per year. However, if the per-unit shortage cost was $25.00, the
maximum shortage level would be 2.99 toothbrushes, the reorder
point would be 47.01 toothbrushes, the order amount would be
501.50 toothbrushes, and the total annual variable inventory cost
would be $74.78 per year. However, the part (d)-ii model would be
VERY similar to part (b) of this assignment (Case Problem 3), as we
would automatically reorder (at the reorder point) when the inventory
was at 48 in part (d)-ii [versus reordering at 50 units in part (b)], and
save approximately $0.22/year by doing so [from $75.00 annual
variable inventory cost in part (b) to $74.78 annual variable inventory
cost in part (d)-ii].
When the shortage cost is lower, Robert would order more

toothbrushes (larger orders) less frequently; the orders would get
placed at the end of a longer cycle time. Because of the way that EOQ
modeling is formatted, the total variable costs are not as largely
impacted with large variations in per-unit shortage costs. The
estimation of unit shortage costs does not impact the decision as to
what constitutes the optimal inventory policy; variations in total
variable costs will not show large effects.
Part (e). EOQ Model with Quantity Discounts

(with Constant Per-unit Carrying Costs)
We will continue to use some of the same data from parts (a), (b), (c), and (d),
including some of the sample cost data (cost of ordering, carrying cost amounts)
and demand data. The lead time stays at 6 days and no shortages are planned to
occur. The summary of the pertinent data remains the same:

*C = Wholesale price/ cost to Nightingale Drugstore =
VARIES**
For part (e), we will make the following assumptions/restrictions + decisions in
the formation of our model:
continuous (fixed- order) quantity system; orders will be placed for same
quantity (EOQ).
4.) The lead time (annotated as L) for the receipt of orders is constant at 6
days for the purpose of this model (non-instantaneous).
The lead time, L, remains at 6 days. This also means that the reorder point, R
would equal 50. This can be concluded because R=dL, where d= demand per
6
time period (in years for this example) and L= 6 days OR 360 years.
L= 6 days =
6
360
years

6
R= = L ( years ) d ( per year ) = 360 3,000 = 50.00 toothbrushes
A chart of the discounts that Totalee is offering for bulk sales is:
Quantity
0-500
501-999
1000+
Price per
toothbrush
$1.25
$1.15
$1.00
In determining optimal order quantity, Qopt, we continue to use the following

formula:
Qopt =
2 C x D
Cc
2 6.25 x 3000
0.15
We will then compute total cost at the eligible discount price:
TCmin =
C
Qopt
[ C (
)]+CD
2
C x D
+
Q opt
6.25 x 3000
+37.5+1.25 (3000)
500
37.5+37.5+3750=$ 3,825
We will then compare the above total cost with order size of 501 and price of
$1.15:
TC =
C
Q
[ C ( ) ]+CD
2
C x D
+
Q
6.25 x 3000
+37.5 75+1.1 5(3000)
501
37.425+37.5 75+34 50=$ 3, 5 25
We will then compare the above total costs with order size of 1000 and price
of $1.00:
TC =
C
Q
[ C ( ) ]+CD
2
C x D
+
Q
6.25 x 3000
+75.00+1.0 (3000)
=
1000
18.7 5+75.00+300 0=$ 3, 093.75
Because of the fact that $3,093.75 is < $3,525 and also < $3,825, the maximum
discount price should be taken (yielding the lowest total cost) and 1000 units
should be ordered at a time, at rarer occurrences than previous scenarios.
This would mean that the number of orders/ year would be:
# orders/year (or cycles/year) =
D
Q opt
3000
= 10 00
= 3.00
cycles/year
The time between orders would be:
Q opt
D
10 00
3000
= 0.333 years = 120
days= 17.143 weeks

The annual carrying/holding cost would be:
Q
opt
$75.00
10 00
= 0.15 2
The annual ordering cost would be:

D
3000
= 6.25 1000
= $18.75
The annual total variable inventory cost would be:
Total variable inventory cost = Annual carrying/ holding cost

+ Annual ordering cost = 75.00 + 18.75 = $93.75
The total inventory cost + the total variable inventory cost would be:
3(1000) + 93.75 = $3,093.75
Under this discount policy, Robert should order 1000 Totalee
toothbrushes at a time, and he should place the order whenever the
inventory reaches 50 units (which would be 3 times per 360-day year,
or every 17.143 weeks). The total inventory cost (including purchase
costs) for each 360-day annual period is $3,093.75.
V. References
Bozarth, C. (2011, January 28). (Supply Chain Resource Cooperative) Retrieved April 11,
2016, from NC State University: Poole College of Management- Professional
Resources: https://scm.ncsu.edu/scm-articles/article/economic-order-quantity-eoqmodel-inventory-management-models-a-tutorial

Gonzalez, D. J. (2016). Multicriteria Decision Making: Chapter 9. University of Texas at
San Antonio. San Antonio. Retrieved February 29, 2016
Homa, K. (n.d.). EOQ Model: Economic Order Quantity. Washington, DC, United States of
America: McDonough School of Business. Retrieved from
http://faculty.msb.edu/homak/homahelpsite/slides/EOQ.ppt
III, B. W. (2016). Introduction to Management Science (12 ed.). (E. Gate, Ed.) Harlow,
Essex CM20 2JE, England: Pearson Education.

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Josh Stevens: Case Project #3

Case Project #3: Inventory

Josh Stevens: Case Project #3

Part (a). Inventory Policy- Basic EOQ Model

Josh Stevens: Case Project #3

R= = L ( years ) d ( per year ) = 360 3,000 = 0 toothbrushes

= 500 toothbrushes/ order

Josh Stevens: Case Project #3

# orders/year (or cycles/year) =

The time between orders would be:

Time between orders =

60.00 days= 8.57 weeks

The calculation of the total variable inventory cost would be:

Josh Stevens: Case Project #3

Total annual variable inventory cost = annual carrying cost

The optimal inventory policy is that 500 toothbrushes should be

Part (b). EOQ Model with Non-Instantaneous

D= Demand/ year = 3000 toothbrushes/year

Josh Stevens: Case Project #3

d= 3000 toothbrushes/ year

R= = L ( years ) d ( per year ) = 360 3,000 = 50.00 toothbrushes

= 500 toothbrushes/ order

Josh Stevens: Case Project #3

# orders/year (or cycles/year) = Q opt

Time between orders =

60.00 days= 8.57 weeks

The total variable inventory cost would remain the same:

Total annual variable inventory cost = annual carrying cost

The optimal inventory policy is that 500 toothbrushes should be

Josh Stevens: Case Project #3

demand will remain constant, so Robert would continue to order these

Part (c). EOQ Model with Planned Shortages

D= Demand/ year = 3000 toothbrushes/year

Josh Stevens: Case Project #3

C = Wholesale price/ cost to Nightingale Drugstore =

Cs= Cost of Shortage= 1.50/toothbrush-year

Josh Stevens: Case Project #3

2.) We will be selling one product, toothbrushes.

In determining optimal order quantity, Qopt, we use the following formula:

1.0488 = 524.40 toothbrushes/ order

We will calculate the maximum inventory level by subtracting maximum shortage

Max. inventory level = Qopt S opt = 524.40- 47.682 = 476.718

R = L ( years ) D( per year ) = 360 3,000

The reorder point (accounting for shortages), Rs, can be calculated by

Rs = RS opt = 50.00- 47.673 = 2.327 toothbrushes

The annual carrying/holding costs will be:

Josh Stevens: Case Project #3

Annual carrying cost =

The annual ordering costs will be:

The total annual shortage costs will be:

Annual shortage cost =

The total variable inventory cost will be:

Total annual variable inventory cost = annual carrying cost

Because of Roberts desire to allow planned shortages to occur, the

Josh Stevens: Case Project #3

Part (d). EOQ Model with Planned Shortages:

D= Demand/ year = 3000 toothbrushes/year

Cs= Cost of Shortage= 1.50/toothbrush-year

Josh Stevens: Case Project #3

constant amount when the inventory decreases to a specific determined

Part (d)-i. Using the lowest per-unit shortage cost (0.85)

1.085 = 542.326 toothbrushes/ order

Max. inventory level = Qopt S opt = 542.326- 81.349 =