SUBMITTED BY: SUBMITTED TO:

SHEIKH MOHD ARIF SHAFI Prof. GIRISH PHATAK

2010B51

OPERATION RESEARCH PENALTY ASSIGNMENT

QUESTION: TT Beverage Co. is a distributor of beer, wine and soft drinks product.
From a main warehouse located in Magusa, TRNC, TT supplies nearly 1000 retail
stores with beverage products. The beer inventory, which constitutes about 40%
of the company’s total inventory, averages approximately 50 000 cases. With an
average cost per case of approximately 8MU, TT estimates the value of its beer
inventory to be 400 000 MU.

The warehouse manager has decided to do a detailed study of inventory costs

associated with Sergio Beer, the # 1 selling TT beer. The purpose of the study is to
establish the “how-much to order,” and “when to order” decisions for Segio Beer
that will result in the lowest possible cost.

The manager found that the demand is constant and 2 000 cases/week. The cost
of holding for the TT beer inventory is 25% of the value of the inventory.

(Note that definding the holding cost as a % of the value of the product is
convenient, because it is easily transferable to other products)

TT is paying 32 MU/order regardless of the quantity requested in the order.

Suppose TT is open 5 days each week, and the manufacturer of Sergio Beer
guarantees 2-day delivery on any order placed.
 a) Find Economic Order Quantity.

b) Find reorder point.

c) How frequently the order will be placed?

d) Find the cycle time?

e) Calculate minimum total inventory cost.

Solution:

a) Find EOQ

2CB 2 ( 2000×52 )( 32 )
X 0=
√ √Zp
=
0 .25×8
=1824 cases

The use of an order quantity of 1824 cases will yield the minimum-cost inventory policy for TT
beer.

b) Find the reorder point

R0 =c⋅t Lt
2000
c= =400
5
R0 =400 units×2 days=800 cases

c) How frequently the order will be placed?

C 104000
N= = =57 order / year
X 1824

d) Find the cycle time.

1 1
T = = ×260=4 .6 days
N 57

The cycle time is 4.6 working days.

e) Calculate minimum total inventory cost.
K e= √2 CBEZp=√2 ( 104000 ) ( 32 )( 0 . 25 ) ( 8 )
K e= √13312000≃3648 MU 1824 Total order cost ( 57×32 )
1824
1824 Total holding cost ( ⋅2≃1824 )
2