CHAPTER 12

DISCUSSION QUESTIONS
1. The advent of low-cost computing should not be seen as obviating the need for the ABC inventory
classification scheme. Although the cost of computing has decreased considerably, the cost of data
acquisition has not decreased in a similar fashion. Business organizations still have many items for
which the cost of data acuisition for a !perpetual" inventory system is still considerably higher
than the cost of the item.
#. The standard EOQ model assumes instantaneous delivery $delivery of the entire lot is made at one
instant of time%, whereas the &roduction 'nventory (odel assumes that delivery ta)es place at a
constant rate over time.
*. +easons for an organization to maintain inventory include,
n The decoupling function,
inventory can be used to decouple stages in the production process within an
organization
inventory can be used to decouple the production process from instabilities or
irregularities in supply of raw materials or labor
inventory can be used to decouple the production process from unstable demand and
thus $a% allow production scheduling to develop a !smoother" schedule, and $b% avoid
shortages or stoc)outs
n -uantity discounts,
inventory can be used to enable the organization to purchase goods in larger lot sizes
and ta)e advantage of uantity discounts
n A hedge against inflation,
investing in inventory now assures one that the price will not increase
.. Costs that are associated with ordering and maintaining inventory include,
n 'nitial purchase cost of the item
n /olding cost $insurance, space, heat, light, security, warehouse personnel, etc.%
n 0bsolescence or deterioration cost $particularly important in perishable goods or in a product
that is undergoing rapid technological evolution%
n 0rdering or setup cost $cost of forms, clerical processing, etc., or cost of machine setup%
1. The more important assumptions of the basic EOQ model are,
n 2emand is )nown and constant over time.
n The lead time, that is, the time between the placement of the order and the receipt of the
goods, is )nown and constant.
n The receipt of the inventory is instantaneous3 i.e., the goods arrive in a single batch, at one
instant in time.
Chapter 12: Inventory Management 1
n -uantity discounts are not possible.
n The only variable costs are the cost of setting up or placing an order and the cost of holding
or storing inventory over time.
n 'f orders are placed at the right time, stoc)outs or shortages can be completely avoided.
4. The EOQ is relatively insensitive to small changes in demand or setup or carrying costs. 'f, for
e5ample, demand increases by 167, EOQ will increase by appro5imately 17.
8. A decrease in setup time decreases the cost per order, encourages more and smaller orders, and thus
decreases the EOQ.
1#. 'f per unit holding costs increase with increasing inventory, total inventory cost will increase3 EOQ
will decrease.
1.. 'n a fixed-quantity inventory system, when the uantity on hand reaches the reorder point, an order
is placed for the specified uantity. 'n a fixed-period inventory system, an order is placed at the end
of the period. The uantity ordered is that needed to bring on-hand inventory up to a specified
level.
END-OF-CHAPTER PROBLEMS
12.2 /e decides that the top #67 of the 16 items, based on a criterion of demand times cost per unit,
should be A items. $'n this e5ample, the top #67 constitutes only 197 of the total inventory value,
but in larger samples the value would probably approach :67 to 967.% /e therefore rates items ;*
and <# as A items. The ne5t *67 of the items are A#, C:, and 213 they represent #*7 of the value
and are categorized as B items. The remaining 167 of the items $items B9, =8, /#, '1, and >9%
represent 187 of the value and become C items.
Item Annual Demand Cost ($)
Demand Cost
Classification
A# *,666 16 116,666 B
B9 .,666 1# .9,666 C
C: 1,166 .1 4:,166 B
21 4,666 16 46,666 B
=8 1,666 #6 #6,666 C
;* 166 166 #16,666 A
<# *66 1,166 .16,666 A
/# 466 #6 1#,666 C
'1 1,:16 16 1:,166 C
>9 #,166 1 1#,166 C
12.3 Item Annual Demand Cost ($)
Demand Cost
Classification
=16# 966 ..66 *,#66 C
2#* 1,#66 9.66 8,466 A #:7
2#: :66 *.66 #,166 C
+6# 1,666 #.66 #,666 C
+18 #66 9.66 1,466 C
?16: 166 4.66 *,666 C
?1#* 1,#66 1.66 1,#66 C
@11 966 :.66 1,466 B 147
@#* 1,166 1.66 1,166 C **7
A:1 1,166 ..66 4,666 B 1:7
12.4 : 666 616 :66 , . :66 #6 *1 *1 A items per day
: 666 6 *1 # .16 , . , #.16 46 .6 9* . .1 B items per day
: 666 6 11 *916 , . , *916 1#6 *# *1 C items per day
169 items
2 Instructors Solutions Manual t/a Operations Management
12. EOQ
( ) # 1666 4# 16
6 16
166
.
.
units
12.! EOQ
( ) # 9 666 .1
#
466
,
units
12." *66
# 9 666 .1
86 666
:#6 666

( ) ,
,
,
H H
H
:#6 666
86 666
,
,
B9
12.# $a% =conomic 0rder -uantity $/olding cost C B1 per year%,
Q
DS
H

# # .66 .6
1
96 units
where, D C period demand, S C setup or order cost, H C holding cost
$b% =conomic 0rder -uantity $/olding cost C B4 per year%,
Q
DS
H

# # .66 .6
4
:* units
where, D C period demand, S C setup or order cost, H C holding cost
12.$ $a% =conomic 0rder -uantity,
Q
DS
H

# # 1166 116
.1
166
,
units
where, D C period demand, S C setup or order cost, H C holding cost
$b% /olding cost

QH
#
166 .1
#
#16 66 B#, .
$c% 0rder cost

DS
Q
1166 116
166
#16 66 B#, .
$d% +eorder point,
+eorder point C demand during lead time
1166
*66
4 *6
,
units day days units
12.1% +eorder point C demand during lead time
166 #1 #166 units day days units ,
12.11 +eorder point C demand during lead time
166 1. : 666 units day days units ,
12.12 $a% =conomic 0rder -uantity,
Q
DS
H

# # . 666 #1
616 86
1.81
,
.
. or 1.8 valves
where, D C period demand, S C setup or order cost, H C holding cost
$b% Average inventory :. 1 . valves
$c% Dumber of orders per year

2emand
EOQ
. 666
1.8
#4 9
,
.
or #: orders
$d% Assuming #16 business days per year, the optimal number of business days between orders is
given by,
Chapter 12: Inventory Management 3
0ptimal number of days
#16
#:
8
1
.
days
$e% Total annual inventory cost 0rder cost holding cost +
+

+

+
DS
Q
QH
#
. 666 #1
1.8
1.8 61 86
#
4:11. 4:6 16 *.14.
, .
. . B1, .
Dote, 0rder and carrying costs are not eual due to rounding of the EOQ to a whole number.
$f% +eorder point C demand during lead time
14 1 days 96 units day valves
12.13 $a% =conomic 0rder -uantity,
Q
DS
H

# # 1 666 *6
16
:: .4
,
. or :9 units
where, D C period demand, S C setup or order cost, H C holding cost
$b% Average inventory
:9
#
*8 units
$c% Dumber of orders per year

2emand
EOQ
1 666
:9
4.1
,
.
or 4. orders
$d% Assuming #16 business days per year, the optimal number of business days between orders is
given by,
0ptimal number of days
#16
4.
*81 . days
$e% Total cost order cost holding cost +
+

+

+
DS
Q
QH
#
1 666 *6
:9
:9 16
#
18#*6# 1816 9:*69
,
, . , B*, .
Dote, 0rder and carrying costs are not eual due to rounding of the EOQ to a whole number.
'f an EOQ of ::..4 is used, the order and carrying costs calculate to B1,8*4..8 for a total
cost of B*,9:#.89.
$f% +eorder point,
+eorder point C demand during lead time

1 666
16 #66
, units
#16 days
days
units
This is not to say that we reorder when there are #66 units on hand $as there never are%. The
+0& indicates that orders are placed several cycles prior to their actual demand.
12.14 $a% =conomic 0rder -uantity,
Q
DS
H

# # 1#66 #1
#.
16
,
units
where, D C period demand, S C setup or order cost, H C holding cost
$b% Total cost C order cost E holding cost
+
DS
Q
QH
#
;or Q #1,

+

1#66 #1
#1
#1 #.
#
166
,
B1,
4 Instructors Solutions Manual t/a Operations Management
;or Q .6 ,

+

1#66 #1
.6
.6 #.
#
#*6
,
B1,
;or Q 16 ,

+

1#66 #1
16
16 #.
#
#66
,
B1,
;or Q 46 ,

+

1#66 #1
46
46 #.
#
##6
,
B1,
;or Q 166 ,

+

1#66 #1
166
166 #.
#
166
,
B1,
As e5pected, small variations in order uantity will not have a significant effect on total
costs.
12.1 $a% Total cost C order cost E holding cost
+
DS
Q
QH
#
;or Q 16 ,
466 46
16
16 #6
#
:#6 166 ##6

+

+ B1,
$b% =conomic 0rder -uantity,
Q
DS
H

# # 466 46
#6
46 units
where, D C period demand, S C setup or order cost, H C holding cost
;or Q 46 ,
466 46
46
46 #6
#
466 466 #66

+

+ B1,
$c% +eorder point,
+eorder point C demand during lead time

466
16 #.
units
#16 days
days units
12.1! =conomic 0rder -uantity, noninstantaneous delivery,
units . . #*68
#66
16
1 66 . 1
#66 16666 #
% F $ 1 G
#

1
]
1

p d H
DS
Q
where, D C period demand, S C setup or order cost, H C holding cost, d C daily demand rate, p C
daily production rate
12.1" =conomic 0rder -uantity, noninstantaneous delivery,
units . . 1411
116
.6
1 96 . 6
166 9666 #
% F $ 1 G
#

1
]
1

p d H
DS
Q
where, D C period demand, S C setup or order cost, H C holding cost, d C daily demand rate, p C
daily production rate
12.1# $a% =conomic 0rder -uantity, noninstantaneous delivery,
units # . 1#1:
166
16
1 46 . 6
.6 16666 #
% F $ 1 G
#

1
]
1

p d H
DS
Q
Chapter 12: Inventory Management 5
where, D C period demand, S C setup or order cost, H C holding cost, d C daily demand rate,
p C daily production rate
$b% units 1 . 1681
166
16
1 # . 1#1: 1
ma5

,
_

1
]
1

,
_

1
]
1

p
d
Q I
$c%
D
Q

16 666
1#1:
9 ##
,
,
.
$d%
T C
I
H
D
Q
S . . . . .
ma5
+ +
#
*#916 *#996 41:*6
12.1$ =conomic 0rder -uantity,
Q
DS
H

#
where, D C period demand, S C setup or order cost, H C holding cost, P priceFunit
$a% =conomic 0rder -uantity, standard price,
Q

# # 666 16
1
#66
,
units
Total cost order cost holding cost purchase cost + +
+ +

+

+ + + ( )
DS
Q
QH
PD
#
# 666 16
#66
#66 1
#
# 666 1 166 166 # 666 #66
,
, , B#,
$b% -uantity 2iscount,
Total cost order cost holding cost purchase cost + +
+ +

+

+
+ +
( )
DS
Q
QH
PD
#
# 666 16
# 666
# 666 1
#
# 666 6 :1
16 1666 1166 116
,
,
,
, .
, , B#,
Dote, Do, EOQ with #66 units and a total cost of B#,#66 is better.
12.2% @nder present price of B16.66 per unit, =conomic 0rder -uantity,
Q
DS
H
Q

#
# 1666 .6
6 #1 16
96
,
.
units
where, D C period demand, S C setup or order cost, H C holding cost, P priceFunit
Total cost order cost holding cost purchase cost + +
+ +

+

+
+ +
( )
DS
Q
QH
PD
#
1666 .6
96
96 6 #1 16
#
1666 16
166 66 166 66 16 666 666
, .
,
. . , B11,
@nder the uantity discount price reduction of *7,
6 Instructors Solutions Manual t/a Operations Management
Total cost order cost holding cost purchase cost + +
+ +

+

+
+ +
DS
Q
QH
PD
#
1666 .6
#66
#66 6 #1 16 6 8:
#
1666 16 6 8:
#66 66 1#1# 16 .9 166 81# 16
, . .
, .
. . , B.8, .
Therefore, the pumps should be ordered in batches of #66 units and the uantity discount ta)en.
12.21 @nder present price of B:.66 per unit, =conomic 0rder -uantity,
Q
DS
H
Q

#
# 4 666 #6
611 :
.:91 .:9
,
.
. or units
where, D C period demand, S C setup or order cost, H C holding cost, P priceFunit
Total cost order cost holding cost purchase cost + +
+ +

+

+
+ +
( )
DS
Q
QH
PD
#
4 666 #6
.:9
.:9 611 :
#
: 4 666
#1161 #16 81 .# 666 16# 66
, .
,
. . , B.#, .
Dote, 0rder and carrying costs are not eual due to rounding of the EOQ to a whole number.
@nder the uantity discount price of B4.41 per unit,
Total cost order cost holding cost purchase cost + +
+ +

+

+
+ +
( )
DS
Q
QH
PD
#
4 666 #6
* 666
* 666 611 4 41
#
4 666 4 41
.6 66 1.84 #1 *8 866 .*4 #1
,
,
, . .
, .
. , . , B.1, .
Therefore, the new policy, with a total cost of B.1,.*4.#1, is preferable.
12.22 =conomic 0rder -uantity,
Q
DS
H

#
where, D C period demand, S C setup or order cost, H C holding cost, P priceFunit
$a% =conomic 0rder -uantity, standard price,
Q

# .1 16
6 61 #6
*6
.
units
Total cost order cost holding cost purchase cost + +
+ +

+

+
+ +
( )
DS
Q
QH
PD
#
.1 16
*6
*6 6 61 #6
#
.1 #6
11 11 866
.
B8*6
$b% -uantity 2iscount, :1 units or more. =conomic 0rder -uantity, discount over :1 units,
Q

# .1 16
6 61 1916
*118
. .
. or *1 units
Chapter 12: Inventory Management 7
Because EOQ C *1 and a discount is given only on orders of :1 or more, we must calculate
the total cost using a :1-unit order uantity,
Total cost order cost holding cost purchase cost + +
+ +

+

+
+ +
( )
DS
Q
QH
PD
#
.1 16
:1
:1 6 61 1916
#
.1 1916
4 *. 48 9*# 16 18
. .
.
. . B9:*.
$c% -uantity 2iscount, 166 units or more3 =conomic 0rder -uantity, discount over 166 units,
Q

# .1 16
6 61 11 :1
**91
. .
. or *. units
EOQ C *. and a discount is given only on orders of 166 or more, thus we must calculate the
total cost using a 166-unit order uantity. Calculate total cost using 166 as order uantity,
Total cost order cost holding cost purchase cost + +
+ +

+

+
+ +
( )
DS
Q
QH
PD
#
.1 16
166
166 6 61 11 :1
#
.1 11 :1
. 1 *8 *9 :69 :1 4*
. .
.
. . . B:1#.
Based purely upon cost, the decision should be made to order in uantities of 166, for a total
cost of B:1#.4*.
't should be noted, however, that an order uantity of 166 implies that an order will be
placed roughly every two years. Hhen orders are placed that infreuently, obsolescence may
become a problem.
12.23 =conomic 0rder -uantity,
Q
DS
H

#
where, D C period demand, S C setup or order cost, H C holding cost, P priceFunit
$a% 0rder uantity 8 sheets or less, unit price C B19.66
Q

# 166 .1
6 #6 19
16
.
units
Total cost order cost holding cost purchase cost
see note at end of problem re. actual price
+ +
+ +

+

+
+ + ( )
( )
DS
Q
QH
PD
#
166 .1
16
16 6 #6 19
#
19 166
86 86 1966 896
.
, B1,
$b% 0rder uantity 16 to 16 sheets, unit price C B1:.16
Q

# 166 .1
6 #6 1: 16
16 :
. .
. units or 11 units
Total cost order cost holding cost purchase cost + +
+ +

+

+
+ +
( )
DS
Q
QH
PD
#
166 .1
11
11 6 #6 1: 16
#
1: 16 166
99#* 98 #1 1:16 66 18#: .9
. .
.
. . . .
8 Instructors Solutions Manual t/a Operations Management
Dote, 0rder and carrying costs are not eual due to rounding the EOQ to a whole number.
?ee note at end of problem regarding price.
$c% 0rder uantity more than 16 sheets, unit price C B1:.#1
Q

# 166 .1
6 #6 1: #1
111
. .
. units or 11 units
Total cost order cost holding cost purchase cost + +
+ +

+

+
+ +
( )
DS
Q
QH
PD
#
166 .1
11
11 6 #6 1: #1
#
1: #1 166
99#. 9: 89 1:#166 861##
. .
.
. . , . B1, .
Therefore, order 11 units.
Dote, 0rder and carrying costs are not eual due to rounding of the EOQ to a whole
number.
'mportant Dote, Calculations of total cost under $a% and $b% are actually inappropriate
because the original assumptions as to lot size would not be satisfied by the calculated EOQs.
12.24 D :66 1# , H 1, S 16
Allen
1I.88 B14.66
166I888 B11.16
1666E B11.66
Bake
1I*88 B14.16
.66I:88 B11.46
966E B11.16
Q
DS
H

( ) # # 9 .66 16
1
.6899 .16
,
.
Aendor, Allen
at .16, TC + + ( ) ( ) ( )
.16
#
1
9 .66
.16
16 9 .66 14 ..8*4
,
, B1*4, .
at 166, TC + + ( ) ( ) ( )
166
#
1
9 .66
166
16 9 .66 111 #86
,
, . B1*#,
at 1666,
TC + + ( ) ( ) ( )
1666
#
1
9 .66
1666
16 9 .66 11 8#6
, ,
,
, B1#9,
B!"#
Aendor, Ba)er
at .16, TC + + ( ) ( ) ( )
.16
#
1
9 .66
.16
16 9 .66 1146 698*8
,
, . B1**, .
at 966, TC + + ( ) ( ) ( )
966
#
1
9 .66
966
16 9 .66 1116 *41
,
, . B1#8,
Chapter 12: Inventory Management $