Kojima, Yuji
Expurma Midterm Exam Part 2
A distributor for a internationally multi-awarded battery for quality, performance
and reliability expects to sell approximately 9,600 Outlast Super Premium bat-
tery next year. Annual carrying cost is P16 per battery, and ordering cost is P75
per order. The distributor operates 288 days a year (he is on vacation the remain-
ing days of the year).
Solutions:
Annual usage (A) = 9,600 battery per year
Annual usage (C) = P16 per battery
Annual usage (O) = P75 per battery
1. EOQ= 2 x 9600 x 75 = 300 battery
16
2. Number of orders per year = 9600 battery = 32 times
300 battery
3. Lenght of order cycle: 300 battery = 1 of a year
9,600 battery/yr 32
whice is 1 x 288, or 9 working days
32
4. TC = 300 x16 + 9600 x 75
2 300
= P2,400 + P2,400
= P4,800
Mr. John takes two special tablets per day, which are delivered to his home seven
days after an order is called in. At what point should Mr. John reorder?
Solutions:
In this case, the daily demand and lead time are both constants (special random varia-
ble), and
d = 2
l = 7
Therefore
ROP = lD = 2 x 7 = 14
i.e Mr.John should reorder when there are 14 tablets left.
The Vatel Restaurant used an average of 50 jars of a special sauce each week.
Weekly usage of sauce has a standard deviation of 3 jars. The manager is willing
to accept no more than a 10 percent risk of stockout during lead time, which is
two weeks. Assume the distribution of usage is Normal. What is the ROP?
Solutions:
d = 50 jars/week, LT = 2 weeks, ad = 3 jars/week
Acceptable risk = 10 percent, so service level is 0.90
a. Because only demand is variable ( i.e., has a standard deviation) the second model is
appropriate.
b. From appendix B, table B, using a service level of 0.90, you obtain z = 1.28.
c. ROP = d x LT + z LT
= 50(2) + 1.28 2(3) = 100 + 5.43 = 105.43
Because the inventory is discrete units (jars) we round this amount to 106 (generally,
round up.)
Colmenar’s Hat Store in Baguio stocks a chook (or beanie) that is a popular
seller. Annual demand is 5,000 units, the ordering cost is P15, and the inventory
holding cost is P4/unit/year.
Solutions:
a. The order quatity is
EOQ = 2(5,000)(P15)
4
= 37,500 = 193.65 or 194 beanie
b. The total annual cost is
= 194 (P4) + 5000 (P15) = P 774.60
2 194
For a coffee product managed by Andrew Cafe according to the Economic Order
Quantity method, the table shows monthly demand rates for the last two years
The product is bought at P20 per unit. Set up cost is P105 and holding cost is
35% of the purchasing price.
Service level decided by management is 95%.
Delivery lead time is 1 month.
Solutions:
1. EOQ = 2DS/H = 190,1315 ≈ 190
2. Number of orders = D/EOQ = 1205/190 ≈ 6.3 orders per year
3. Time between orders = EOQ / D = 0,15 year or similarly EOQ/D*(12 months/year) =
1,89 months ≈ 2 months
A Venue is a popular 100-room athlete's dormitory in Arellano Street, Malate.
Managers need to keep close tabs on all room service items, including a special
pine-scented bar soap that athletes (and former athletes) use. The daily demand
for the soap is 275 bars, with a standard deviation of 30 bars. Ordering cost is
P10 and the inventory holding cost is P0.30/bar/year. The lead time from the sup-
plier is 5 days, with a standard deviation of 1 day. The dorm is open 365 days a
year.
Solutions:
a. We have D = (275)(365) = 100,375 bars of soap; = S = P10; and H = P0.30.
The EOQ for the bar of soap is
EOQ = 2(100,375)(P10)
P0.30
= 6,691,666.7 = 2,586.83 or 2,786 bars
b. We have d = 275 bars/day, od= 30 bars, L = 5 days, and a LT = 1 day.
= (5)(30)2 +(275)2(1)2 = 283.06 bars
Consult the body of the Normal Distribution appendix for 0.9900. The closest value is
0.9901, which corresponds to a z value of 2.33. We calculate the safety stock and reor-
der point as follows:
Safety stock = dLT = (2.33)(283.06) = 659.53 or 660 bars
Reorder point = dL + Safety stock = (275)(5) + 660 = 2,035 bars
The meteoric rise of Dell Computers was largely due to innovations in supply
chain and manufacturing, but also due to the implementation of a novel distribu-
tion strategy. By carefully analyzing and making strategic changes in the per-
sonal computer value chain, and by seizing on emerging market trends, Dell Inc.
grew to dominate the PC market in less time than it takes many companies to
launch their first product. In 1985, Dell changed his strategy to begin offering
built-to-order computers. That year, the company generated $70 million in sales.
Five years later, revenues had climbed to $500 million, and by the end of 2000,
Dell’s revenues had topped an astounding $25 billion. In maximum 8 concise sen-
tences, explain substantially the following strategies that brought these suc-
cesses:
Solutions:
A. Disintermediation (cutting out the middleman) = Deleting a player in the distribution chain
is a risky move, but can result in a substantial reduction in operating costs and dramatically
improved margins. Some companies that have surged ahead after they eliminated an ele-
ment in the traditional industry distribution chain include:
• Expedia (the online travel site that can beat the rates of almost any travel
agency, while giving customers more choice and more detailed information on their va-
cation destination)
• Amazon.com (an online sales platform that allows small-scale buyers and sellers
to access a broad audience without the need for an expensive storefront or a custom
website)
B. Enhancing customer value = Forgoing the retail route allowed Dell to simultaneously im-
prove margins while offering consumers a better price on their PCs. This move also gave
customers a chance to configure PCs according to their specific computing needs. The dra-
matic improvement in customer value that resulted from Dell’s unique distribution strategy
propelled the company to a leading market position.
C. Process and operations innovation = Michael Dell recognized that “the way things had
always been done” wasn’t the best or most efficient way to run things at his company. There
are countless examples where someone took a new look at a company process and real-
ized that there was a much better way to get things done. It is always worth re-examining
process-based work to see if a change could improve efficiency. This is equally true whether
you’re a company of five or 500.
D. Let data do the driving = Harnessing the easily accessible sales and customer feedback
data that resulted from online sales allowed Dell to stay ahead of the demand curve in the
rapidly evolving PC market. Similarly, sales and feedback data were helpful in discovering
new ways to enhance customer value in each of Dell’s key customer segments. Whether
your company is large or small, it is essential to keep tabs on metrics that could reveal
emerging trends, changing attitudes, and other important opportunities for your company.
Dell’s profits and shares have dropped considerably from their peaks in recent
times. The computer manufacturer would have to shift its longstanding direct
sales model in the face of the PC business’s increasing maturity. To stay compet-
itive, Dell would have to consider selling through retail channels such as Costco
or local computer stores. About six months later, Dell announced that it would of-
fer Dimension PCs and Inspiron notebooks through Wal-Mart and Sam’s Club.
And in September 2007 Dell announced that it would take this channel strategy
overseas, selling computers through China’s largest electronics retailer. But what
was Dell’s rationale for the recent sales model shift?
Solutions:
Dell has recently noticed a drop in their sales, despite being one of the leaders in the in-
dustry, dell’s operations has started to be obsolete compared to their rivals. The ra-
tionale for the model shift was brought about by competition. In order to be competitive
in the industry, they have to expand and the scope of their marketing and operations.
From taking out intermediaries to using more than one.
