MANAGING INVENTORY IN SUPPLY CHAINS

1. Harley-Davidson has its engine assembly plant in Milwaukee and its motorcycle assembly plant in
Pennsylvania. Engines are transported between the two plants using trucks, with each trip costing $1,000.
The motorcycle plant assembles and sells 300 motorcycles each day. Each engine costs $500, and Harley
incurs a holding cost of 20 percent per year. How many engines should Harley load onto each truck? What is
the cycle inventory of engines at Harley?

2. As part of its initiative to implement just-in-time (JIT) manufacturing at the motorcycle assembly plant in
Exercise 1, Harley has reduced the number of engines loaded on each truck to 100. If each truck trip still
costs $1,000, how does this decision impact annual inventory costs at Harley? What should the cost of each
truck trip be if a load of 100 engines is to be optimal for Harley?

3. A retail store sells 500 jackets each month. Each jacket costs the store $100 and the company has an
annual holding cost of 25 percent. The fixed cost of a replenishment order (including transportation) is
$100. The store currently places a replenishment order every month for 500 jackets. a. What is the annual
holding and ordering cost?
b. On average, how long does a jacket spend in inventory?
c. If the retail store wants to minimize ordering and holding cost, what order size do you recommend?
d. How much would the optimal order reduce holding and ordering cost relative to the current policy?

4. Amazon sells 10,000 Lenovo PCs every month. Each PC costs $500 and Amazon has a holding cost of 20
percent. For what fixed cost per order would an order size of 10,000 units be optimal? For what fixed cost
per order would an order size of 2,500 units be optimal?

5. A steel rolling mill can produce I-beams at the rate of 20 tons per week. Customer demand for the beams
is 5 tons per week. To produce I-beams, the mill must go through a setup that requires changing to the
appropriate rolling patterns. Each setup costs the mill $10,000 in labor and lost production. I-beams cost the
mill $2,000 per ton and the mill has a holding cost of 25 percent. What is the optimal production batch size
for I-beams? What is the annual setup cost of the optimal policy? What is the annual holding cost?

6. Harley purchases components from three suppliers. Components purchased from Supplier A are priced at
$5 each and used at the rate of 20,000 units per year. Components purchased from Supplier B are priced at
$4 each and are used at the rate of 2,500 units per year. Components purchased from Supplier C are priced
at $5 each and used at the rate of 900 units per year. Currently, Harley purchases a separate truckload from
each supplier. As part of its JIT drive, Harley has decided to aggregate purchases from the three suppliers.
The trucking company charges a fixed cost of $400 for the truck with an additional charge of $100 for each
stop. Thus, if Harley asks for a pickup from only one supplier, the trucking company charges $500; from two
suppliers, it charges $600; and from three suppliers, it charges $700. Suggest a replenishment strategy for
Harley that minimizes annual cost. Assume a holding cost of 20 percent per year. Compare the cost of your
strategy with Harley’s current strategy of ordering separately from each supplier. What is the cycle
inventory of each component at Harley?

7. Avtek, wants to reduce its large stock of televisions. So it has offered a local chain of stores a quantity
discount pricing schedule, as follows: Price Rs. 14000 for a quantity less than 50; Rs. 11000 for a quantity
between 51 and 90 and Rs 9000 above quantity 90. As the procurement manager for the chain of stores,
you have arrived at the following estimates. The annual carrying cost for a TV is Rs. 1900; the ordering cost
is Rs 25000 and the annual demand for this TV is estimated as 200 units. Would you take the discount offer
or go for the EOQ?