Operations and Production Management

MGMT 405

Answer set 5

MGMT 405 Operations and Production Management Answer set 5 (Reference chapters 12 William J. Stevenson-2007, ninth edition) Problems
1. The manager of an automobile repair shop hopes to achieve a better allocation of inventory control efforts by adopting an ABC approach to inventory control. Using the following monthly usage and classify the items in A, B, and C categories according to dollar usage: Item
4021 9402 4066 6500 9280 4050 6850 3110 4400 Usage Unit Cost

50 300 40 150 10 80 2000 400 7000

$ 1400 12 700 20 1020 140 15 20 5

(a) Calculate monthly dollar value in each raw. (b) Use the concept of ABC classification and array from highest to lowest. (c) Array the items in decending order. (d) Briefly explain the abovementioned scenario. (e) How could the manager use the information formed in the above Table.

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Operations and Production Management

MGMT 405

Answer set 5

(f) After reviewing your classification scheme, suppose that the manager decides to place 4400 into the A category. What may be some possible explanations for this decision? ANS: (a) and (b) Item
4021 9402 4066 6500 9280 4050 6850 3110 4400 Usage Unit Cost Usage X Unit Cost 70000 3600 28000 3000 10200 11200 30000 8000 35000 Category A C B C C C B C B

50 300 40 150 10 80 2000 400 7000

1400 12 700 20 1020 140 15 20 5

(c ) In descending order

Item
4021 4400 6850 4066 4050 9280 3110 9402 6500

Usage X Unit Cost 70000 35000 30000 28000 11200 10200 8000 3600 3000

Category A B B B C C C C C

d) The first item has relatively high monthly dollar value, so it seems reasonable to classify them as A item. The next three items appear to have moderate monthly dollar values and should be classified as B items. The remainder are C items due to their relatively low monthly dollar value.

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Operations and Production Management e) To allocate control efforts.

MGMT 405

Answer set 5

(f) It may be important for some reason other than dollar usage such as cost of a stockout, usage highly correlated to an A item etc....

2. A bakery buys flour in 25 pound bag. The bakery uses an average an average of 4860 bags a year. Preparing an order and receving a shipment of flour involves a cost of $ 10 per order. Annual carring cost is $ 75 per bag. (a) Determine the EOQ? (b) What is the average number of bags on hand? (c) How many orders per year will there be? (d) Compute the total cost of ordering and carring flour. (e) How much would that affect the minimum total annual cost if the ordering costs were to increase by $ 1 per order?

ANS:

(a) D=4860 bags per year, S=$ 10 and H=$ 75 Q= 2 DS = H 2(4860)10 = 36 bags 75

(b) Q/2= 36/2= 18 bags

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Operations and Production Management

MGMT 405

Answer set 5

(c) Number of order per year : 4860 bags D = = 135 orders Q 36 bags / order

(d) TC = (e) 36 Q D 4860 H+ S= 75 + 75 = $ 2700 2 Q 2 36

Q=

2 DS = H

2(4860)11 = 37.757 bags 75

TC =

Q D 37.757 4860 H+ S= 75 + 11 = $ 2831.79 2 Q 2 37.757

Increased by 2831.79-2700= $ 131.79 3. A manufacturer produce x drug in 100-pound bags. Demand for this product is 20 tons per day. The capacity for producing the product is 50 tons per day. Setup costs $ 100, storage and handling costs are $ 5 per ton a year. The firm operates 200 days per year and 1 ton is equal to 2000 pounds. (a) How many bags per run areOptimal (i.e. run size)? (b) What would the average inventory be for this lot size? 2010/11, Sami Fethi, EMU, All Right Reserved, McGraw-Hill, 2007, 9. Ed. 4

Operations and Production Management

MGMT 405

Answer set 5

(c) Determine the approximate lenght of a production run in days. (d) About how many runs per year would there be Run time? (e) How much could the company save annually if the setup cost could be reduced to $25 per run ? ANS:

(a) P= 50 ton/day, time is 200 days, u=20 tons/days, D= 20x200=4000 tons/year ,S=$ 100 and H=$ 5 ton per year. The economic run quantity Q = 2 DS H P = P U (2) (4000) (100) 50 = 516.40 tons 5 50 20

Or 516.40x2000= 10328 bags (b) I max = Qo 516.40 ( p u) = (50 20) = 309.84 tons or 6196.8 bags p 50

I AV =

I max Qo 309.84 = ( p u) = = 154.92 tons 2 p 2

(c) Run length = QO 516.4 = = 10.33 days P 50 5

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Operations and Production Management (d)

MGMT 405

Answer set 5

Run per year =

D 4000 = = 7.75 Q 516.4

(e)

TC min = carring cos t or handling cos t + setup cos t = ( Handling cost =774.5 Setup cost=774.5 If setup cost is $ 25

I max D 309.84 4000 )H + S= ($5) + ($100) = $ 1549 2 Qo 2 516.4

The economic run quantity Q =

2 DS H

P = P U

(2) (4000) (25) 50 = 258.2 tons 5 50 20

I max =

Qo 258.2 ( p u) = (50 20) = 154.92 tons p 50

TC min = carring cos t or handling cos t + setup cos t = (

I max D 154.84 4000 )H + S= ($5) + ($25) = $ 774.5 2 Qo 2 258.2

Savings would be 1549-774.5=$ 774.5

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Operations and Production Management 4.

MGMT 405

Answer set 5

A manufacturer of exercise equipment purchases the pulley section of the equipment from supplier who lists these prices: less than 1000, $5 each; 1000 to 3,999, $ 4.95 each; 4000 to 5999, $ 4.90 each; and 6000 and more $ 4.85. Ordering costs are $ 50, annual carring costs per unit are 40 percent of purchase cost, and annual usage is 4900 pulleys. Determine

(a) the common EOQ (the common minimum point) (b) the total cost if the feasible minimum point is on the lowest price range, that is the optimal order quantity. (c) the total cost if the feasible minimum point is in any other price range. ANS:

Range 0 to 999 1000 to 3999 4000 to 5999 6000 and more (a) H= 0.40 P

Price $ 5 4.95 4.90 4.85

H= 0.40 (5)=2 ;H= 0.40 (4.95)=1.98; H= 0.40 (4.90)=1.96; H= 0.40 (4.85)=1.94 D=4900; S=$ 50

Q5 =

2 DS = H

2(4900)(50) = 494.97 nearly 495 seats 2 2 DS = H 2( 4900 )( 50 ) = 497 .46 nearly 498 seats 1.98 Q4.90 = 2(4900)(50) = 500 seats 1.96

Q4.95 =

2 DS = H

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Operations and Production Management 2 DS = H

MGMT 405

Answer set 5

Q4.85 =

2( 4900)(50) = 503 seats 1.94

First one is feasible because it is in the range compared to the others.

(b) TC = Carrying cost + Order cost + Purchase cost

TC 495 =

495 Q D 4900 H+ S + PD = ($2) + ($50) + ($5) (4900) = $ 25490 2 Qo 2 495

(c) 1000 Q D 4900 H+ S + PD = ($1.98) + ($50) + ($4.95) (4900) = $ 25490 2 Qo 2 1000

TC1000 =

TC 4000 =

4000 Q D 4900 H+ S + PD = ($1.96) + ($50) + ($4.90) ( 4900) = $ 27991 2 Qo 2 4000

TC 6000 = 5.

6000 Q D 4900 H+ S + PD = ($1.94) + ($50) + ($4.85) (4900) = $ 29626 2 Qo 2 6000 A newspaper publisher uses roughly 800 feet of baling wire each day to secure

bundles of newspapers while they are being distributed to carriers. The paper is published Monday through Saturday. Lead time is six working days. The company desires a service level of 95% when stock-out risk for various levels of safety stocks are as follows: 1500 feet, 0.10; 1800 feet, 0.05; 2100 feet, 0.02; and 2400 feet, 0.01? (a) What value of Z is appropriate?

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Operations and Production Management (b) Find the standard deviation of lead time? (c) What reorder point should be used? ANS: (a) What value of Z ias appropriate? Daily usage=800feet/day Lead time is 6 days

MGMT 405

Answer set 5

Safety stock= Z dLT=1800 at level of 0.05 percent Risk =1-0.95=0.05 percent 0.05 from z table (lead time), z= 1.64 (page 569, table 12.3)

(b) Find the standard deviation of lead time? Safety stock = Z dLT= 1800 at level of 0.05 percent

dLT=1800/1.64= 1097.561

(c) What reorder point should be used? ROP= Expected demand in (LT) + ZdLT =(800)*(6)+1800= 6000 feet 6. A manager of a construction supply house determined from historical records that demand for sand during lead time averages 300 units. In addition, the manager determined that demand during lead time could be described by a normal distribution that has a mean of 300 units and a standard deviation of 30 units. 2010/11, Sami Fethi, EMU, All Right Reserved, McGraw-Hill, 2007, 9. Ed. 9

Operations and Production Management

MGMT 405

Answer set 5

(a) Determine the appropriate Z-value whilst risk of stockout 1 percent? (b) Determine ROP when the risk of stockout is 1 percent during lead time? (c) Find the safety stock needed to attain a 1 percent risk of stockout during lead time? (d) Would a stockout risk of 2 percent require more or less safety stock compared to a 1percent risk? ANS:

(a) Risk =1-0.01=0.99 percent 0.99 from z table (lead time), z= 2.33 (page 569, table 12.3) (b) LT=300, LT=30 ROP= Expected demand in (LT) + ZdLT =300+(30) (2.33)= nearly 370 units (c) Safety stock = Z dLT= 2.33(30)= nearly 70 units

(d) Ans: IF risk is 2 Risk =1-0.01=0.98 percent 0.99 from z table (lead time), z= 2.04 (page 569, table 12.3) LT=300, LT=30

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Operations and Production Management

MGMT 405

Answer set 5

ROP= Expected demand in (LT) + ZdLT =300+(30) (2.04)= nearly 361 units Safety stock = Z dLT= 2.04(30)= nearly 61.2 units when risk is 2, z, safety stock and ROP are found smaller compared to the previous one.

7. A computer store sells an item which is supplied by a vendor who handles only that item. Demand for this item recently changed. The manager wants a probability of at least 96 percent of not having a stockout during lead time. The manager expects demand to average a dozen units a day and have a standard deviation of 2 units a day. Lead time is variable averaging four days with standard deviation of one day. Assume normality and seasonality is not a factor. (a) Find the appropriate Z value. (b) What is ROP? Z= .96, d=12 units/day, d=2units/day, LT=4 days, LT=1 day ANS:

(a) SL=96% Z = $1.75 (page 569, table 12.3) (b)

2 2 ROP = d L T + z L T d + d LT

ROP = 12 * 4 + 1.75 (4)(4) + (144)(1) = 70.14

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Operations and Production Management

MGMT 405

Answer set 5

8. Demand for jelly doughnuts on Saturdays at Dons Doughnut Shoppe is shown in the following table. If labor, materials, and overhead are estimated to be $ 3.20 per dozen, doughnuts are sold for $ 4.80 per dozen, and left over doughnuts at the end of each day are sold the next day at half price,

(a) Determine the shortage and excess costs (b) Determine the service level (c) Calculate the stockout risk factor (d) list the cumulative tables for demand (e) Compute the optimal number of doughnuts?

Demand (Dozen) 19 20 21 22 23 24 25 26 27 28 29 ANS:

Relative.Freq. 0.01 0.05 0.12 0.18 0.13 0.14 0.10 0.11 0.10 0.04 0.02

(a) Ce = Cost per unit- Salvage value per unit =$ 3.20-2.40= $ 0.80 per dozen 2010/11, Sami Fethi, EMU, All Right Reserved, McGraw-Hill, 2007, 9. Ed. 12

Operations and Production Management Cs = Revenue per unit-Cost per unit =$ 4.80-$ 3.20=$ 1.60 per dozen

MGMT 405

Answer set 5

(b) Service level = Cs/(Cs+Ce) = 1.60/(1.60+0.80)=0.67 (c) Stockout risk = 1.00 0.67 = 0.33 (d) Demand (Dozen) 19 20 21 22 23 24 25 26 27 28 29

Relative Freq. Cumulative Freq. 0.01 0.05 0.12 0.18 0.13 0.14 0.10 0.11 0.10 0.04 0.02 0.01 0.06 0.18 0.36 0.49 0.63 0.73 0.84 0.94 0.98 1.00

(e) Since the service level falls between the cumulative probabilities of 0.63 (24) and 0.73 (25), this means that the company should stock 25 dozen doughnuts because 0.67 is closer to 0.73.

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