ME3102D Management of Production Systems

ME3102D Management of Production System

Monsoon 2020-21
Inventory Management: Some solved problems

1. A newspaper publishing concern that replenish its supply of paper stock on the basis of
reorder level. The paper comes in large rolls and that the printers use it up at the rate of 32
rolls per week. The cost of replenishment, which includes the cost of bookkeeping, trucking
and handling, will be taken to Rs 250 plus the cost of the paper. The cost of keeping the
paper on hand, including the rent for the space occupied, insurance and interest on the capital
tied up will be Rs 10 per roll per week.
(a) What should be the inventory policy of the concern and its total cost? Also, calculate time
between orders.
(b) In the above case, replenishment cost is wrongly estimated. Actually, the replenishment
cost is 50 % higher than the initial estimate. Determine the percentage change in total cost if
the policy is not changed (That is, previous economic order quantity is used).
(c) If EOQ is determined based on the new replenishment cost and is the order quantity, what
is the percentage change in total cost?
Given data:
Demand (R) = 32 Rolls/week
Ordering Cost, C = Rs. 250 per order
Holding Cost, H = Rs. 10 per roll per week.
(a)
2CR
Economic Order Quantity, Qo =
H
2  32  
=
10
= 40 Rolls.
R Q
Total Variable Cost, TVC (Qo) = C+ 0 H
Qo 2
32 40
=  250 + 10
40 2
= 400
1 Qo 40
Time between orders = T = = = = 1.25weeks
m R 32

(b)
Actual replenishment cost, C’ = 50% higher than the initial
50
= 250 + 250  = 375
100
1

Inventory Management: Some solved problems Oct 2024

Compiled by Dr. VMP, MED, NITC
ME3102D Management of Production Systems

Under this cost, when the order quantity is kept the same as previous EOQ (Q = 40 units), then
R Q
Total Variable Cost, TVC’ (Q) = C '+ H
Q 2
32  375 40  10
= + = 500
40 2
TVC'−TVC 500 − 400
% change in total variable cost =  100 =  100 = 25
TVC 400

(c)
New replenishment cost, C* = 50% higher than the initial
50
= 250 + 250  = 375
100

2C * R 2  32  
Economic Order Quantity, Q*o = = = 48.98 = 49 Rolls.
H 10
R * Q*0
Total Variable Cost, TVC (Q o) = * C +
*
H
Qo 2

32 49
=   + 10 = 489.897
49 2

TVC * − TVC 489.89 − 400

% change in total variable cost =  100 =  100 = 22.47
TVC 400
(Hope you understood the concept of sensitivity of the total cost model.)

2. All unit discount problem

R = 2000 units, C = Rs 200 per order, F = 0.2,
L = 2 months
Discount schedule
Q ≤ 400, P0 = 100
401 ≤ Q ≤ 800, P1 = 98
801 ≤ Q ≤ 1500, P2 = 97
Q ≥ 1501, P3 = 96
Determine the continuous review inventory control system, if the discount schedule is all
units.

Inventory Management: Some solved problems Oct 2024

Compiled by Dr. VMP, MED, NITC
ME3102D Management of Production Systems

Answer
Q0 at P = 204 units (Not valid)
3
Q0 at P = 203 units (Not valid)
2
Q0 at P = 202 units (Not Valid)
1
Q0 at P = 200 units (Valid)
0
TC (Q0 at P0) = 204000
TC (U1 at P1) = 200927.3
TC (U2 at P2) = 202269.1
TC (U3 at P3) = 206676.1
Therefore, economic order quantity = 401 units.
B = 334
Q-system – Whenever inventory position = 334 or less order 401 units.

3. A firm fabricates a part that is used in a continuous assembly line operation in another area of
the plant. The part is scheduled intermittently for fabrication for 20 days processing period.
During a processing period, 300 parts can be fabricated each day. The assembly line
operation uses the part at a consistent rate of 200 units per operating day. i) What is the
production run size for the item? ii) What is the maximum inventory level? Its Average
inventory level? iii) If it takes two days to set up the fabrication process, what is the
production re-order point in units?
Given data:
Processing period, tp = 20 days.
Production rate, pi = 300 per day
Usage or demand rate, ri = 200 per day
Lead time = 2 days
Answer
i). Production run size for the item, Q = pi  tp = 300  20 = 6000 units.
ii). Maximum inventory = (pi - ri) tp = (300-200) 20 = 2000 units.
Average inventory = maximum inventory/2 = 2000/2 = 1000 units
iii). Production reorder point = RL = 200  2 = 400 units.

4. For a product to be manufactured within the company, the details are as follows:
Demand = 24,000 units per year

Inventory Management: Some solved problems Oct 2024

Compiled by Dr. VMP, MED, NITC
ME3102D Management of Production Systems

Production rate = 48,000 units per year

Set-up cost = Rs. 200 per set-up
Carrying cost = Rs. 20 per unit per year
Determine the economic production quantity and maximum inventory.
Answer:

2CRp
Q0 =
H ( p − r)

2  200  24000  48000

Q0 =
20(48000 − 24000)
= 979.79  980 Units
Max. Inventory = (p-r)tp = (p-r)Q/p
= (48000 – 24000) ×980/48000 = 490 Units
5. A company uses certain raw material for production and it consumes annually 1200 units.
The quotations received for this material are:
Supplier Rate/unit Minimum acceptable order
A 50 1500
B 65 350
C 60 900
The cost of ordering is Rs 40 per order and cost of inventory carrying is 30 % of the
material cost. Whom would you place the order with and why? What would be the order
quantity?

Given data
Demand, R = 1200 units
Ordering cost, C = Rs. 40
Holding cost fraction = 30% of the material cost.
For choosing a supplier,
2CR 2  40 1200
EOQ( A) = = = 80
PA F 50  0.3
2CR 2  40 1200
EOQ( B ) = = = 70.16
PB F 65  0.3
2CR 2  40 1200
EOQ(C ) = = = 73.02
PC F 60  0.3
The above all economic order quantities are less than their minimum acceptable order quantities.
So, they all are invalid EOQs.
4

Inventory Management: Some solved problems Oct 2024

Compiled by Dr. VMP, MED, NITC
ME3102D Management of Production Systems

Hence the minimum acceptable quantity of the supplier is to be considered as the order quantity.
So have to calculate the total cost incurred, for placing an order with supplier A, B and C.
R Q
TC = PR +  C +  PF
Q 2
1200 1500
TC A = 50 1200 +  40 +  50  0.3 = 71282
1500 2
1200 350
TCB = 65 1200 +  40 +  65  0.3 = 81549.64
350 2
1200 900
TCC = 60 1200 +  40 +  60  0.3 = 80153.33
900 2
When comparing above total cost, placing order with supplier A is cheaper and hence the order
quantity is 1500 units and the order is placed with supplier A.

6. Periodic inventory control procedure is used for an item. It is reviewed every month. The
parameters of the item are:
Demand - 240 units annually
Lead time - 5 days (Assume 25 working days/month)
At a review point the inventory available on-hand = 10 units.
Determine the order quantity.
Calculate the economic order interval for the item by considering the following data
Price - Rs. 25 per unit
Carrying cost - 20 %
Order cost - Rs. 100 per order
Compare the total cost of optimal policy with the policy of reviewing every month.
Given data:
Review period, T = 1 month
Demand, R = 240 units per year
Lead time, L = 5 days (assume 25 days per month)
On-hand inventory at a review point: 10 units.

a). In a P-system, order quantity = maximum inventory level – on-hand inventory at the review
point.
Maximum inventory level = (T+L) R
240
= ( 25 + 5) = 24 units
12  25
Order quantity = (24 – 10) = 14 units.

b). Given data: Price, P = Rs. 25 per unit

Carrying cost, F = 20%
Order cost, C = Rs. 100 per order.
5

Inventory Management: Some solved problems Oct 2024

Compiled by Dr. VMP, MED, NITC
ME3102D Management of Production Systems

C RTo
Total cost, TC (To) = PR + + PF
To 2
2C 2 100
Economic order interval, To = = 0.408 years.
PFR 25  0.2  240

100 240  0.408  25  0.2

TC (To ) = 25  240 + + = 6489.89
0.408 2

When, review period To = 1 month

240  1 25  0.2
Total cost, TC(T = 1 month) = 25  240 + 12  100 + + = Rs 7250
12  2
The total cost under economical order interval is lesser than the total cost under monthly review.

7. The details of a component manufactured by the company XYZ is as follows:

Demand = 24,000 units per year
Production rate = 4,000 units per month (finite replenishment rate)
Setup cost = Rs. 200 per setup
Carrying cost = Rs. 20 per unit per year
(a) Determine the economic production quantity.
(b) The above item is available from a supplier at a cost of Rs. 104 per unit. The order cost is
Rs. 80 per order. The in-house production cost is 100 per unit. Should the item be
purchased externally or produced internally?
(c) This component has a lead time of 2 weeks. Determine the Q-system parameters for the
component when the discount is not available. If the company carries a safety stock of 300
units for this component, what is the reorder level?
Ans:
(a) EPQ = SQRT(2*24000*200*4000/(20*2000)) = 979.8
(b) EOQ = SQRT(2*24000*80/20) = 438.18
when Q = 438.18, TC =24000*104+24000*80/438.18+438.18*20/2 = 2504764
when Q = EPQ, TC = 24000*100+24000*200/979.8+979.8*20*0/2 = 2404899
Produce internally is the better option
(c) Q-system parameters: B = 923 units and Q = 979.9 ≅ 980 units
When safety stock = 300 units: B = 300+923 =1223 units

Inventory Management: Some solved problems Oct 2024

Compiled by Dr. VMP, MED, NITC