DL & SCM 2015

Workgroup Session 1: September 7

Problem 1
Sport Zones running shoes division sources its line of shoes from a supplier in China. The
selling season is short compared to the long lead time, and therefore Sport Zone can only place a
single order at the Chinese supplier at the beginning of the selling season when the demand is
still uncertain. Sport Zone forecasts that the demand for this line of shoes is normally distributed
with mean 2,100 and standard deviation 600 during the upcoming season.
Each pair of shoes costs Sport Zone 30. Sport Zone sells the shoes at 90 each. The leftover
inventory can be sold to discounters for 10 at the end of the season. Fixed ordering cost is zero.
(a) How many shoes should Sport Zone buy to maximize its expected profit in the upcoming
season? What is its expected profit?
(b) Sport Zone recently found an alternative supplier in Portugal with a higher unit cost of 50,
but with a negligible lead time (i.e., effectively zero lead time). As the lead time from the
Portuguese supplier is zero, Sport Zone can place an order at this supplier even after the demand
is realized and the quantity procured from the Chinese supplier is not sufficient to meet all
demand (e.g., if the quantity procured from the Chinese supplier is 100 units, and demand during
the season turns out to be 120 units, Sport Zone can purchase the 20 units of remaining demand
from the Portuguese supplier. Please assume that there is no cost associated with meeting the
demand for these 20 units after the demand is realized). That is, Sport Zone is able to meet all the
demand during the season purchasing from both suppliers.
How many shoes should Sport Zone buy from China to maximize expected profit, considering
that it still has a chance to order some quantity from Portugal after demand is realized? What is
its expected profit in this case?
(c) Now suppose that Sport Zone has to pay a fixed fee to secure supply from the Portuguese
supplier (i.e., cost of having the option to place an order at this supplier, if need be). This will
be a one-time payment at the beginning of the selling season and is independent of the quantity
ordered. How much would Sport Zone be willing to pay to have this additional Portuguese
supplier?

Problem 2
Davids Delicatessen flies in Hebrew National salamis regularly to satisfy a growing demand for
the salamis in Silicon Valley. The owner, David Gold, estimates that the demand for salamis is
pretty steady at 175 per month. The salamis cost Gold $1.85 each. The fixed cost of calling his
brother in New York and having the salamis flown in is $200. It takes three weeks to receive an
order. Golds accountant, Irving Wu, recommends an annual cost of capital of 22%, a cost of

shelf space of 3% of the value of the item, and a cost of 2% of the value for taxes and insurance.
(a) How many salamis should Gold have flown in and how often should he order them? What is
the total cost?
(b) How many salamis should Gold have on hand when he phones his brother to send another
shipment?
(c) Suppose that the wholesaler offers an all unit quantity discount with a price of $1.60 per
salami for orders under 1,500 units. What is the optimal order for Gold?
(d) Now suppose that the salamis sell for $3 each. Are these salamis a profitable item for Gold?
If so, what annual profit can he expect to realize from this item? (Assume no quantity
discount and that he operates the system optimally)
(e) If the salamis have a shelf life of only 4 weeks, what is the trouble with the policy that you
derived in part (a)? What policy would he have to use in that case? Is the item still profitable?

Problem 3 (adapted from Chopra and Meindl Book)

Weekly demand for Nokia cell phones at a Media Markt store is normally distributed, with a
mean of 300 and a standard deviation of 200. Nokia takes two week to supply a Media Markt
order. Media Markt is targeting a CSL of 95% and monitors its inventory continuously.
(a) How much safety inventory (SS) of Nokia cell phones should Media Markt carry? What
should its Reorder Point (R) be?
(b) For R from 600 to 1260 units, calculate the SS and CSL achieved (use increments of 10).
Plot the CSL vs SS.
(c) The store manager has decided to follow a periodic review policy to manage inventory of
cell phones. She plans to order every three weeks. How much inventory should the store
carry? What should its order-up-to level (S) be?
(d) Return to the case of continuous review policy and assume that the lead time of Nokia is
no longer constant, but normally distributed with a mean of 2 weeks and a standard
deviation of 1.5 weeks. How much SS should media Markt now carry if it wants to
provide a CSL of 95%?
(e) How does the required SS change as the standard deviation of lead time is reduced from
1.5 weeks to zero in interval of 0.5 weeks? Plot SS vs lead time st.dev.
(f) If Media Markt has a policy of ordering cell phones from Nokia in lots of 500, what fill
rate does the store achieve?