PROBLEM SHEET ON INVENTORY CONTROL 1.

M/s Gujjubhai Shah and company is an old firm where scientific inventory management is totally unknown. For a certain raw material that they buy, it is estimated that each purchase order would cost Rs.200/-. The cost of the raw material is Rs.30 per kg; the annual inventory carrying cost is 14 per cent of the cost per kg; the monthly requirement is 100 kg. The ordering quantity has been arbitrarily fixed as 440kg. If this ordering quantity is to be optimum by fluke, what should be the value of the shortage cost, assuming that shortages can be allowed? 2. Marchand and Wadichand Fabrics run a huge show room for readymade Garments. The Show room is famous for garments made of a certain variety of cotton. The firm has a quarterly requirement of 2000 metres length of this variety of cloth, which costs Rs.38/- per metre.The proprietors have made a precise estimate of their ordering cost - thirty two rupees, thirty paise per order. The carrying cost per year is estimated to be 8.5 per cent of the cost per metre length. Marchands son Lalit Chand, who has recently joined the business after completing his MBA, insists that they should procure the cloth in economic order quantities. However, their supplier, Naidu Garu Textile Mills, Coimbatore, is not willing to sell less than 2000 metres of the cloth per order. What is the discount on the unit cost that Lalit Chand should demand in order to give up his insistence on EOQ? 3. The Central Supplies Unit, IIT, Madras is considering quotations from three vendors to whom it has to place orders for rice. SSG Provision Stores quotes Rs.120/- per bag irrespective of the quantity ordered. SPS and Company will accept orders only for 800 or more bags but quotes a price of Rs.108/- per bag. Sushil Trading Co. will accept orders only for 1000 or more bags at Rs.100/- per bag. The total requirement of the thirteen hostels, for whom the CSU buys, is 3000 bags per semester. Inventory carrying costs are 20 per cent of unit cost and ordering cost for the CSU Rs.400/- per order. If you were the Hostel Affairs Secretary, which vendor should you recommend to the Warden, CSU, for placing the orders and for what quantity per order? 4. A Company carries an inventory composed of two products A and B for which there is a uniform yearly demand of 10,000 and 20,000 units respectively. Product A costs the company Rs.2/- unit to purchase, Re.1/-unit/year to store, and Rs.100/- in administrative costs every time it is reordered. Product B costs the company Rs.4/- unit to purchase, Rs.2/unit/year to store, and Rs.200 in administrative costs for each reorder. (a) Set up the total cost equations for each product separately and solve for their optimum order quantities. (b) Owing to a liquidity problem, the company requires that the average yearly investment in inventory for the two products taken together be less than or equal to Rs.6000/-. Is the answer found in part (a) consistent with this added constraint? (c) Find the optimum solution when the average yearly investment in inventory must be less than or equal to Rs.5000. Average yearly investment is the rupee value of the average amount of inventory present. 5. A shop sells two products that it orders periodically from one supplier. The demand rates for both products are predictable and constant. Demand rates and inventory costs are given by the following table: Product A B Demand rate Units/month 100 300 Order cost Rs./order 50 50 Holding cost Rs./Unit/Month 25 3

(a) Find the optimum values of the inventory cost per month and the length of both inventory cycles under the assumption that both inventory processes are managed separately.

(b) The shop finds that they could save on order costs, if both products were ordered together. This course of action can be evaluated by finding the minimum total inventory cost per month, subject to the constraint that the two inventory periods be equal. Write the objective function and the constraint. Show how to solve this by Lagrangian Multiplier method. 6. Messrs. Ghatilkar and Pillkarni Chemicals Private Ltd., own a plant in Chembur which processes three chemicals in liquid form for consumption within the factory itself at a uniform rate. The following are the particulars relating to the three items: Item Annual consumption in In Litres 36,000 30,000 50,000 Cost per Litre (Rs) 20 40 20 Processing Time for 100 Litres

1. 2. 3.

2 hours 13 1/3 min. 3 hours 20 min. 1 hour 36 min.

Setting up the plant to start production of any of these items takes 8 hours for every set up. However, during set-up, the plant is not productivity engaged; the estimated cost of the idleness of the plant due to set up is Rs.100/- per hour. The company works on a two-shifts-5 day week basis for 50 weeks, the remaining 2 weeks being the annual shut down period for maintenance work. Each shift is of 8 hours duration. The inventory carrying charges per year are 10 per cent of the cost per litre for each chemical. The chemicals processed by the plant are collected and stored in 10-litres cans. On an average how many such cans should be made available, if the company desires to turn out these chemicals in economic processing quantities? Suppose there are only 500 cans available, and assuming that the average requirement of cans should never exceed this number, how should the economic processing quantities be modified to satisfy this restriction? 7. Using the distributions shown below, specify the recorder point and safety stock for a Q system and a risk of shortage of 4 per cent. 0.6 0.5 0.4 0.3 0.2

2 3 Lead time (weeks)

100 150 200 Demand (units/weeks)

8. Determine the Buffer stock for a. 100 per cent service level under P and Q systems for an inventory
problem with the following date:

0.1 0

0.4

0.3

0.2 3

0.25 2

0.4

0.5

1 2 Demand per day Order quantity = 5 units.

3 4 Lead time (days)

Will there be any difficulty in operating an inventory system with such values?

9. Suppose the demand for a particular unit is distributed as shown below, determine the order point and safety stock for a Q system if the lead time is a constant 2 months. Demand (units per month) 1000 1100 1200 1300 1400 The permissible risk of a stockout is specified as .01. 10. Consider the following inventory system Average daily demand Average lead time Carrying cost Shortage cost No. of orders per year. Lead time demand Probability (i) (ii) 25 .075 50 .125 75 .175 = = = = = 100 .250 4 units 25 days Rs.50/- per unit per year Rs.40/- per unit short 10 125 .175 150 .125 175 .075 Probability of Occurrence .1 .2 .4 .2 .1

Compute service-levels for various possible buffer stocks. Find the annual carrying costs and shortage costs for various reorder levels and thus find the optimal reorder level.

11. The Materials Manager of a Company has to decide on the ordering and stocking policies for an item. He works out a Q-system which would normally result in 12 orders per year. The average daily usage is 6 kgs and the average lead time is 24 days. The demand during lead time is distributed as follows: Lead time demand (Kgs) Probability of occurrence 108 0.15 120 0.10 132 0.15 144 0.20 156 0.10 168 0.20 180 0.10

(a) What risk of shortage does the manager face if he does not hold any safety stock? (b) What should the reorder point and safety stock be if the manager is content with a 90% protection against shortages?