PRACTICE PROBLEMS FOR MANAGING INVENTORY

1. Battle, who works in her brother’s hardware store, is in charge of purchasing. Lila has
determined that the annual demand for #6 screws is 100,000 and is fairly constant over the
200 days that the store is open each year. She estimates that it costs $10 every time an order
is placed. This cost includes her wages, the cost of the forms used in placing the order, and so
on. Furthermore, she estimates that the cost of carrying one screw in inventory for a year is
0.5 cents.
i. How many #6 screws should Lila order at a time to minimize the cost?
ii. How many orders she will place in one year
iii. After how many day she will make re-orders
iv. What is the total cost of inventory (not including the purchase cost)
v. It takes 8 working days for an order of #6 screws to arrive once the order has been
placed. What should be the re-order point (ROP)

2. Barbara Bright is the purchasing agent for West Valve Company. West Valve sells industrial
valves and fluid control devices. One of the most popular valves is the Western, which has an
annual demand of 4,000 units. The cost of each valve is $90, and the inventory carrying cost
is estimated to be 10% of the cost of each valve. Barbara has made a study of the costs
involved in placing an order for any of the valves that West Valve stocks, and she has
concluded that the average ordering cost is $25 per order. Furthermore, it takes about two
weeks for an order to arrive from the supplier, and during this time the demand per week for
West valves is approximately 80. Compute the EOQ, ROP, optimal number of orders per
year, and total annual cost for Western valves.

3. Ken Ramsing has been in the lumber business for most of his life. Ken’s biggest competitor
is Pacific Woods. Through many years of experience, Ken knows that the ordering cost for an
order of plywood is $25 and that the carrying cost is 25% of the unit cost. Both Ken and
Pacific Woods receive plywood in loads that cost $100 per load. Furthermore, Ken and
Pacific Woods use the same supplier of plywood, and Ken was able to find out that Pacific
Woods orders in quantities of 400 loads at a time. Ken also knows that 400 loads is the EOQ
for Pacific Woods. What is the annual demand, in loads of plywood, for Pacific Woods?

4. Shoe Shine is a local retail shoe store located on the north side of Centerville. Annual demand
for a popular sandal is 500 pairs of sandals, and John Dirk, the owner of Shoe Shine, has been
in the habit of ordering 100 pairs of sandals at a time. John estimates that the ordering cost is
$10 per order. The cost of a pair of sandals is $5.
a) For John’s ordering policy to be correct, what would the carrying cost have to be as a
percentage of the unit cost?
b) If the carrying cost were 10% of the unit cost, what would be the optimal order quantity?

5. Jan Gentry is the owner of a small company that produces electric scissors used to cut fabric.
The annual demand is for 8,000 scissors, and Jan produces the scissors in batches. On
average, Jan can produce 150 pairs of scissors per day during the production process.
Demand for scissors has been about 40 pairs of scissors per day. The cost to set up the
production process is $100, and it costs Jan 30 cents to carry 1 pair of scissors for one year.
How many scissors should Jan produce in each batch?
6. Jim Overstreet, inventory control manager for Itex, receives wheel bearings from Wheel-Rite,
a small producer of metal parts. Unfortunately, Wheel-Rite can produce only 500 wheel
bearings per day. Itex receives 10,000 wheel bearings from Wheel-Rite each year. Because
Itex operates 200 working days each year, the average daily demand of wheel bearings by
Itex is 50. The ordering cost for Itex is $40 per order, and the carrying cost is 60 cents per
wheel bearing per year. How many wheel bearings should Itex order from Wheel-Rite at one
time? Wheel-Rite has agreed to ship the maximum number of wheel bearings that it produces
each day to Itex when an order has been received.

7. A catfish bait manufacturer uses a secret blend of ingredients to make their infamous bait.
One of these ingredients, we’ll call it X for proprietary reasons, is the major component in the
mixture. X is ordered in 55 gallon barrels from out of state and is used at the rate of 800
barrels per year. Each order that is placed with the supplier costs $45 to process. Storage
space is at a premium on the manufacturing floor and out in the yard, so their annual cost to
hold inventory is $80 per barrel. The owner’s brother-in-law provides transportation services
and his record has been less than stellar, so lead time has averaged 6 days with a standard
deviation of 3. Stopping the process would be disastrous, so the plant manager has set a 95%
service level on the reorder point.
i. What is the best order quantity?
ii. What is the total cost at this reorder point?
iii. What is the reorder point?
iv. What is the cost of holding this safety stock?
v. What is the safety stock

8. A small refrigeration shop stocks up on electric motors from a catalog supplier located in the
Midwest. The price of the motors varies depending on the quantity purchased; the price
breaks are shown in the table. The refrigeration shop knows it will need around 600 motors
for the coming season and that it will cost them about $40 to place an order. Storage cost for
the motors is $10 each. In previous years they have bought all 600 at once and they are
considering doing this again. What order quantity would you advise and how much can they
save using your recommendation instead of their one order per year strategy?
Quantity Price/unit
1-49 $35.00
50-99 $34.00
100-499 $33.00
500 or more $30.00

9. Three Chums Fish Company buys fresh salmon daily from the fishermen that ply the deep
waters of Puget Sound. Salmon are purchased for $2.50 per pound and sold to the public at
$8.50 per pound. The salmon are kept fresh by displaying them on ice but at the end of the
day, any unsold fish have a noticeable odor and are sold to a nearby chowder stand for $1 per
pound. The past year’s demand for salmon on Saturdays is shown in the table. Based on this
information, what should their target service level and stocking point be? What is the
significance of the target stocking level?
Daily Demand (pounds) # Days at This Level
300 3
320 4
340 6
360 9
380 9
 400 8
420 6
440 5
460 2

10. The purchasing manager for the Pacific Steel Company must determine a policy for ordering
coal to operate 12 convertors. Each converter requires an average of 5 tons of coal per day to
operate, and the firm operates 360 days per year. The purchasing manager has determined
that the ordering cost is $80 per order, and the cost of holding coal (in dollars per year per
ton) is 20% of the average dollar value of inventory held. The purchasing manager has
negotiated a contract to obtain coal for $12 per ton for the coming year.
i. Determine the optimal order quantity of coal to receive in each order?
ii. How many orders the manager expects to place in the coming year?
iii. Determine the total inventory-related costs associated with the optimal ordering policy
(do not include the cost of the coal)?
iv. If five days’ lead time is required to receive an order of coal, What should be Re- Order
Point (ROP)?
v. What will be the safety stock if the company has 95% policy to meet the unprecedented
demand during the lead time? Assume the standard deviation in the daily demand is 1
ton
vi. What is the new ROP after having safety stock?
vii. Sketch and Inventory model diagram and identity a) EOQ b) ROP c) Cycle time

11. Northern Distributors is a wholesale organization that supplies retail stores with lawn care
and household products. One building is used to store Neverfail lawn mowers. The building
is 25 feet wide by 40 feet deep by 8 feet high. Anna Young, manager of the warehouse,
estimates that about 60% of the warehouse can be used to store the Neverfail lawn mowers.
The remaining 40% is used for walkways and a small office. Each Neverfail lawn mower
comes in a box that is 5 feet by 4 feet by 2 feet high. The annual demand for these lawn
mowers is 12,000, and the ordering cost for Northern Distributors is $30 per order. It is
estimated that it costs Northern $2 per lawn mower per year for storage. Northern
Distributors is thinking about increasing the size of the warehouse. The company can do this
only by making the warehouse deeper. At the present time, the warehouse is 40 feet deep.
How many feet of depth should be added on to the warehouse to minimize the annual
inventory costs? How much should the company be willing to pay for this addition?
Remember that only 60% of the total area can be used to store Neverfail lawn mowers.

12. North Manufacturing has a demand for 1,000 pumps each year. The cost of a pump is $50. It
costs North Manufacturing $40 to place an order, and the carrying cost is 25% of the unit
cost. If pumps are ordered in quantities of 200, North Manufacturing can get a 3% discount
on the cost of the pumps. Should North Manufacturing order 200 pumps at a time and take
the 3% discount?

13. Dillard Travey receives 5,000 tripods annually from Quality Suppliers to meet his annual
demand. Dillard runs a large photographic outlet, and the tripods are used primarily with
35mm cameras. The ordering cost is $15 per order, and the carrying cost is $0.50 per unit per
year. Weekly demand is 100 tripods.

a. What is the optimal order quantity?

 b.

Additional problems from text book:

Title: Introduction to operations and supply chain management, 2 nd edition, Pearson international
edition
Authors: Cecil C. Bozarth, and Robert B. Handfield
Page 467- 470
Problems: 1 to 4, 15 to 20, 22 to 24, 25 and 26

TRUE/FALSE

1. Cycle stock can occur at more than one point in a supply chain.

2. Companies do not plan to use safety stock.

3. Dependent demand inventory never needs hedge inventory.

4. The order quantity in a periodic review system rises as the on-hand inventory falls.

5. The reorder point increases as the service level falls.

6. A company that orders at their economic order quantity has an annual ordering cost that is
half of their total cost.

7. In order for the economic order quantity model to work, demand must be known and
constant.

8. Decreases in the standard deviation of demand reduce the amount of safety stock that should
be held.

9. In order to find the lowest cost ordering policy in a quantity discount model, you must
compare the holding cost, ordering cost, and the cost of goods for various order quantities.

10. The excess cost of an item is the profit you would have made on it.

11. A target service level is the point where the expected cost of a shortage equals the expected
cost of having excess units.

12. As the average demand rises, the standard deviation of demand always falls.

13. The bullwhip effect says that a small change in demand downstream in the supply chain
causes a large change in demand upstream.

14. The flexibility of inventory increases as materials move down the supply chain.
 MULTIPLE CHOICE

1. The inventory that companies hold to protect themselves against uncertainties in either
demand or replenishment time is called:
a. safety stock.
b. anticipation inventory.
c. hedge inventory.
d. smoothing inventory.

2. Individual links in the supply chain can stabilize their production at the most efficient level
by using:
a. safety stock.
b. anticipation inventory.
c. linkage inventory
d. smoothing inventory.

3. The mismatch between timing of customer demand and supply chain lead times is what
drives the need for:
a. safety stock.
b. anticipation inventory.
c. cycle stock.
d. hedge inventory.

4. Which of the following relationships shows dependent demand inventory?

a. A business purchases a new car when the old one wears out.
b. A tire maker buys cleaning supplies.
c. An automaker purchases four tires for each car they produce.
d. A winemaker buys grapes from farmers in the Columbia Valley.

5. The beef jerky driver shows up every Monday to take orders from his convenience store
customers. One fine Monday morning he stops in the Quik-E Mart and notes that there are
only three sticks on the shelves. Consulting his route sheet, he discovers that the restock level
is 40. The order quantity is therefore:
a. 3 sticks.
b. 37 sticks.
c. 40 sticks.
d. Cannot be determined with the information given.
6. A hospital’s biomedical repair shop uses a 4-week periodic system to maintain the inventory
on the blood pressure cuff repair parts. They use an average 40 adult arm cuffs with a
standard deviation of 6 cuffs every four weeks. Cuffs aren’t the most critical item they carry,
but the manager would like to avoid the embarrassment of a stockout at least 95% of the time.
What should their restocking level be?
a. 40 cuffs
b. 46 cuffs
c. 50 cuffs
d. 52 cuffs

7. Which of these conditions is NOT necessary for the economic order quantity model to be
valid?
a. The item has a constant demand.
b. The item has a constant lead time.
c. The item has a constant price.
d. The item has a constant safety stock.

8. If demand increases by 100%, the average inventory held in a system governed by the EOQ
model:
a. is increased 100%.
b. is decreased by 100%.
c. is decreased by 50%.
d. is increased by 40%.

9. A law firm always orders 50 cases of paper from their office supply company. They incur an
annual holding cost of $15 per case and have an ordering cost of $25 each time they place an
order. If their annual demand is 480 cases, how much could they save annually by switching
to their economic order quantity?
a. $15
b. $25
c. $40
d. $80

10. A manufacturer replenishes their packaging materials according to the economic order
quantity model. They use 25,000 cases of packaging materials per year and order 500 cases at
a time. Their cost to carry a case in inventory for a year is $12. How much does it cost them
to place an order with their supplier?
a. $12
b. $60
c. $720
d. $5

11. Which of these conditions is likely to cause a decrease in the probability of a stockout?
a. higher lead time variance
b. lower lead time
c. higher demand level variance
d. lower service level

12. A university orders all office supplies, including red grading pens, out of a catalog from the
same supplier. Conservative estimates of the demand for these red pens are 12,000 pens per
year. There is a $25 charge for placing an order and the university has a $10 annual cost for
 holding these pens. Prices for the pens are based on the quantity purchased, so if less than
100 are ordered, the unit price is $2.50, if 100 to 299 are ordered, the unit price is $2.40, if
300 to 499 are ordered, the unit price is $2.30, and if 500 or more are ordered, the unit price
is $2.20. What order quantity will result in the lowest total annual cost to the university?
a. 100
b. 245
c. 300
d. 500

13. A local barbecue joint makes one massive batch of potato salad each day. If they run out of
this savory side before the end of the day, their last few customers are less than satisfied, but
if they make too much, they sell it to the local hog farmer for feed. Every serving costs an
equivalent of $0.23 to make, but can be sold for $1.50 to customers and for $0.08 to the hog
farmer. The average daily demand is for 200 servings with a standard deviation of 20
servings. How many servings should be made each day?
a. 220
b. 225
c. 230
d. 235

14. Supply chain inventory:

a. increases in cost as materials move downstream.
b. decreases in value as materials progress downstream.
c. increases in flexibility as materials progress upstream.
d. is governed by the bullwhip effect, which says a small change downstream can cause a
large change upstream.