COMM 225: POM
TOPIC 4: INVENTORY MANAGEMENT– QUESTIONS (Tutorial with Answers)
Q1 (Ref: Q. 13-12, p583): The purchasing manager for Q4 (Ref: Q. 13-38, p586): The Mediterranean
the Pacific Steel company must determine a policy for Restaurant stocks a red Chilean table wine it purchases
ordering coal to operate 12 converters. Each converter from a wine merchant in nearby city. The daily demand
requires exactly 5 tons of coal per day to operate, and for the wine at the restaurant is normally distributed,
the firm operates 360 days per year. The purchasing with a mean of 18 bottles and standard deviation of 4
manger has determined that the ordering cost is $80 bottles. The wine merchant sends a representative to
per order, and the cost of holding coal is 20% of the check the restaurant’s wine cellar every 30 days, and
average value of inventory held. The purchasing during a recent visit there were 25 bottles in stock. The
manager has negotiated a contract to obtain the coal lead time to receive an order is 2 days. The restaurant
for $12 per ton for the coming year. manger has requested an order size that will enable
him to limit the probability of a stock out to 5%. What
a. Determine the optimal quantity of coal to
is the order size?
receive in each order.
b. Determine the total inventory-related costs Answers: Order Size =588.3 bottles
associated with the optimal ordering policy
Q5 (Ref: Q. 13-40, p586): The East Coasters Bicycle
(don’t include the cost of the coal).
shop stocks bikes; helmets ; clothing; a variety of bike
c. If five days lead time is required to receive an
parts including chains, gears , tires, wheels; and biking
order of coal, how much coal should be in hand
accessories. The shop is in a storefront location on a
when an order is placed?
busy street and it has very limited storage space for
Answers: Optimal quantity of coal =1200 tons; Total inventory. It often runs out of items and is unable to
inventory-related costs = $2880; Re-order point = 300 serve customers. To help manage its inventory, the
tons. shop would like to classify the stock using the ABC
system. Following is a list of items the shop stocks and
Q2 (Ref: Q. 13-23, p585) : The bookstore at Tech
the annual demand and unit value for each:
purchases jackets emblazoned with the school name
and logo from a vendor. The vendor sells the jackets to Item Annual Unit Annual Unit
the store for $38 apiece. The cost to the bookstore for Number demand cost Item demand cost
placing an order is $120, and the annual carrying cost is Number
25% of the cost of jacket. The bookstore manager 1 10 $8 17 110 $23
estimates that 1700 jackets will be sold during the year. 2 18 16 18 74 18
The vendor has offered the bookstore the following 3 36 30 19 8 610
volume discount schedule: 4 9 1230 20 10 935
5 4 760 21 7 270
Order Size Discount 6 3 810 22 5 1400
1-299 0% 7 19 420 23 5 900
300-499 2% 8 56 35 24 46 67
500-799 4% 9 105 17 25 32 160
800+ 5% 10 27 350 26 101 45
What is the bookstore optimal order quantity, given 11 19 36 27 83 12
this quantity discount information? 12 12 115 28 54 16
Answers: Optimal quantity of coal =500 tons; Total 13 7 2300 29 14 42
inventory-related costs = $ 64,704 14 10 245 30 9 705
15 6 665 31 7 37
Q3 (Ref: Q. 13-32, p585): Kelly’s Tavern serves 16 18 28 32 16 26
Shamrock draft beer to its customer. The daily demand Classify the inventory items according to the ABC
for beer is normally distributed, with an average of 20 approach using dollar value of annual demand.
gallons and standard deviation of 4 gallons. The lead
time required to receive an order of beer from the local
distributor is 12 days. Determined the safety stock and
reorder point if the restaurant wants to maintain a
90% service level. What would be the increase in the
safety stock if a 95% service level is desired?
Answers: At 90% service level, safety stock =17.87 gal,
Reorder point = 257.87 gal; at 95% service level, safety
stock =22.86 gal; there is an increase of 5 gallons.
TOPIC 4: INVENTORY MANAGEMENT– QUESTIONS (Tutorial with Answers)
Q1 (Ref: Q. 13-12, p583): The purchasing manager for Q4 (Ref: Q. 13-38, p586): The Mediterranean
the Pacific Steel company must determine a policy for Restaurant stocks a red Chilean table wine it purchases
ordering coal to operate 12 converters. Each converter from a wine merchant in nearby city. The daily demand
requires exactly 5 tons of coal per day to operate, and for the wine at the restaurant is normally distributed,
the firm operates 360 days per year. The purchasing with a mean of 18 bottles and standard deviation of 4
manger has determined that the ordering cost is $80 bottles. The wine merchant sends a representative to
per order, and the cost of holding coal is 20% of the check the restaurant’s wine cellar every 30 days, and
average value of inventory held. The purchasing during a recent visit there were 25 bottles in stock. The
manager has negotiated a contract to obtain the coal lead time to receive an order is 2 days. The restaurant
for $12 per ton for the coming year. manger has requested an order size that will enable
him to limit the probability of a stock out to 5%. What
a. Determine the optimal quantity of coal to
is the order size?
receive in each order.
b. Determine the total inventory-related costs Answers: Order Size =588.3 bottles
associated with the optimal ordering policy
Q5 (Ref: Q. 13-40, p586): The East Coasters Bicycle
(don’t include the cost of the coal).
shop stocks bikes; helmets ; clothing; a variety of bike
c. If five days lead time is required to receive an
parts including chains, gears , tires, wheels; and biking
order of coal, how much coal should be in hand
accessories. The shop is in a storefront location on a
when an order is placed?
busy street and it has very limited storage space for
Answers: Optimal quantity of coal =1200 tons; Total inventory. It often runs out of items and is unable to
inventory-related costs = $2880; Re-order point = 300 serve customers. To help manage its inventory, the
tons. shop would like to classify the stock using the ABC
system. Following is a list of items the shop stocks and
Q2 (Ref: Q. 13-23, p585) : The bookstore at Tech
the annual demand and unit value for each:
purchases jackets emblazoned with the school name
and logo from a vendor. The vendor sells the jackets to Item Annual Unit Annual Unit
the store for $38 apiece. The cost to the bookstore for Number demand cost Item demand cost
placing an order is $120, and the annual carrying cost is Number
25% of the cost of jacket. The bookstore manager 1 10 $8 17 110 $23
estimates that 1700 jackets will be sold during the year. 2 18 16 18 74 18
The vendor has offered the bookstore the following 3 36 30 19 8 610
volume discount schedule: 4 9 1230 20 10 935
5 4 760 21 7 270
Order Size Discount 6 3 810 22 5 1400
1-299 0% 7 19 420 23 5 900
300-499 2% 8 56 35 24 46 67
500-799 4% 9 105 17 25 32 160
800+ 5% 10 27 350 26 101 45
What is the bookstore optimal order quantity, given 11 19 36 27 83 12
this quantity discount information? 12 12 115 28 54 16
Answers: Optimal quantity of coal =500 tons; Total 13 7 2300 29 14 42
inventory-related costs = $ 64,704 14 10 245 30 9 705
15 6 665 31 7 37
Q3 (Ref: Q. 13-32, p585): Kelly’s Tavern serves 16 18 28 32 16 26
Shamrock draft beer to its customer. The daily demand Classify the inventory items according to the ABC
for beer is normally distributed, with an average of 20 approach using dollar value of annual demand.
gallons and standard deviation of 4 gallons. The lead
time required to receive an order of beer from the local
distributor is 12 days. Determined the safety stock and
reorder point if the restaurant wants to maintain a
90% service level. What would be the increase in the
safety stock if a 95% service level is desired?
Answers: At 90% service level, safety stock =17.87 gal,
Reorder point = 257.87 gal; at 95% service level, safety
stock =22.86 gal; there is an increase of 5 gallons.
