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IE 550 Manufacturing Systems Design and Analysis
Homework #5 – Inventory Management
1) Drugs On Line (DO) is retailer of prescription drugs and health supplements. Vitamins represent
a significant percentage of its sales. Demand for vitamins is 10,000 bottles per month. DO incurs
a fixed cost order placement, transportation and receiving cost of $100 each time an order for
vitamins is placed with the manufacturer. Holding cost for inventory is 20%. The price charged
by the manufacturer is shown below. How many bottles of vitamins should DO order in each lot.
What is the total cost. ?
Order Quantity Unit Price
1‐5,000 $3.00
5,000‐10,000 $2.96
10,000 or more $ 2.92
2) Suppose that the pricing policy follows an incremental discount policy as below, What should be
the number of bottles that DO should order in each lot, and what is the total cost ?
Order Quantity Incremental Unit Price
1‐5,000 $3.00
5,000‐10,000 $2.96
10,000 or more $2.92
3) Assume that the weekly demand for Ipods at B&M Computer Company is normally distributed,
with a mean of 2,500 and a standard deviation of 500. The manufacturer takes 2 weeks to fill an
order. The store manager currently orders 10,000 ipods when the inventory drops to 6,000.
a. What is the safety inventory carried by B&M
b. What is the average inventory
c. What is the average time spent by an Ipod at B&M
d. What is the probability of not stocking out in a replenishment cycle (Cycle Service
Level)?
e. What is the fill rate (proportion of customer demands satisfied from available
inventory?
f. Suppose that the order quantity is increased to 20,000 what is the impact on fill rate and
cycle service level ?
4) Weekly demand for LEGOS at a Walmart store is normally distributed with a mean of 2,500
boxes and a standard deviation of 500. The replenishment lead time is 2 weeks. The store
manager currently offers replenishment lots of 10,000 boxes from Lego. Assuming a continuous
review policy, what should be the safety inventory the store should carry to achieve a fill rate of
97.5%.