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Logistics 2 (Dr. Jafar Rezaei, TLO, TU Delft)

Some questions from previous exams
(2012-2013-2014)

ABC Analysis
Mention five criteria to classify inventories other than the traditional criteria (inventory price and volume).
(Nov. 2012)

Solution:

lead time, obsolescence, availability, substitutability, criticality, repairability, commonality, certainty of

supply, impact of stock-out, inventory cost, number of requests for the item in a year, scarcity, durability,
order size requirement, stock ability, and demand distribution

Layout Planning
Discuss the factors that should be taken into account for office layouts. (Nov. 2013)

Solution:

Human interaction and communication …

Proximity versus privacy …
Flexibility (traditional load-bearing walls versus partitions, and office-landscaping) …

ABC Analysis (Nov. 2013)

Mention two disadvantages of Analytic Hierarchy Process to classify inventories.

Solution:

It is vulnerable to the number of criteria used.

When the number of criteria is increased, the consistency rate will be very sensitive and reaching a consistent
rate will be very difficult.
It heavily relies on subjective pair-wise comparisons.

Inventory Management (Nov. 2012)

Travel Agency BL-reizen is considering two new suppliers for the backpacks BL-reizen gives to its
customers. The quality of the two suppliers is almost the same. Assume that the annual holding cost is 25
percent of the unit price, monthly demand is 10,000 backpacks, and ordering cost is 30 euro per order for
the first supplier and 45 euro per order for the second supplier. The price lists for the suppliers are as
follows:
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First Supplier Second Supplier

Quantity Unit Price Quantity Unit Price
1-999 10 1-2999 9
1000-3999 9 3000 or more 8
4000 or more 7

a. Determine the optimal order quantity when selecting the first supplier.
b. Determine the optimal order quantity when selecting the second supplier.
c. How much cost will you save when selecting the best supplier?

Solution:
a)
H=0.25 × unit price
D (annual demand) =12×10000=120000
S=30

Necessary formulas:
2 D S
EOQ  Q * 
H
D Q
TC  S  H  CD
Q 2

We begin by the lowest price (7)

2  120000  30
EOQ   2028.37  4000  not acceptable
0.25  7
So we should now calculate the EOQ for unit price = 9

2  120000  30
EOQ   1788.85; 1000 1788.85  3999  acceptable
0.25  9

So, it is not necessary to calculate the EOQ for unit price = 10. What next?! Is 1788.85 the EOQ? We
don’t know. We should now calculate the total cost (TC) for 1788.85 and 4000 (minimum order size
considering lower unit price, 7). Then from 1788.85 and 4000, an order size with lower TC would be the
optimal order quantity.

120000 1788.85
TC(1788.85)  30  (0.25  9)  (9  120000)  1084024.92
1788.85 2
120000 4000
TC(4000)  30  (0.25  7)  (7  120000)  844400
4000 2
844400  1084024.92 TC *  844400 & Q*  4000

b)
H=0.25 × unit price
D (annual demand) =12×10000=120000
S=45

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Necessary formulas:
2 D S
EOQ  Q * 
H
D Q
TC  S  H  CD
Q 2

We begin by the lowest price (8)

2  120000  45
EOQ   2323.79  3000  not acceptable
0.25  8
So we should now calculate the EOQ for unit price = 9

2  120000  45
EOQ   2190.89; 1  2190.89  2999  acceptable
0.25  9
We should now calculate the total cost (TC) for 2190.89 and 3000 (minimum order size considering
lower unit price, 8). Then from 2190.89 and 3000, an order size with lower TC would be the optimal
order quantity.

120000 2190.89
TC(2190.89)  45  (0.25  9)  (9  120000)  1084929.5
2190.89 2

120000 3000
TC(3000)  45  (0.25  8)  (8  120000)  964800
3000 2
964800  1084929.5 TC *  964800 & Q*  3000

c)
TC * (supplier1)  844400; TC * (supplier2)  964800  supplier1is the best

Cost saving due to selecting the best supplier (supplier 1) = 964800-844400=120400

Inventory Management (Nov. 2013)

Company Baneh Co. produces a kind of candle that is sold in a box of 36. Annual demand is 1584000
candles. Baneh Co. has capacity to produce 10000 boxes of candles per month. The setup cost is €50000.
Annual holding cost is €1 per box. Currently Baneh Co. is producing in batches of 400000 candles.

a) Calculate the annual costs of the current operating policy at Baneh Co.
b) Calculate the economic production quantity.
c) Calculate the annual total inventory cost.
d) Calculate the penalty cost incurred with the current policy.

Solution:

a)
D I
TC  S  Max H
Q 2
d
I Max  Q (1  )
p

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1584000
I Max  400000(1  )  253333.3
10000  36 12
1584000 253333.3
TC 400000  50000  (1/ 36)  201518.5
400000 2

b)

2DS 2 1584000  50000

Q   3000632 candels or 83351 boxes
d 1584000
H (1  ) (1/ 36)(1  )
p 10000  36 12
c)
D I
TC  S  Max H
Q 2
d
I Max  Q (1  )
p

1584000
I Max  3000632(1  )  1900400
10000  36 12
1584000 1900400
TC 3000632  50000  (1/ 36)  52788.89
3000632 2
d)
TC 3000632 TC 400000  201518.5  52788.89 = 148729.6

Inventory Management (Jan. 2014)

Company de Kalb has decided to purchase its products from Company de Kaa. The annual holding cost is
20 percent of the unit price, annual demand is 40 000, and ordering cost is 500 € per order. The price list
proposed by the seller is as follows:

Quantity Unit Price

3000 or more 70€
2000-2999 75€
1-1999 80€

a. Determine the optimal order quantity.

b. Determine the total ordering costs, and the total holding costs.
c. Determine the total costs of the optimal ordering policy.

Solution:

a)
H=0.2 × unit price
D (annual demand) = 40 000
S = 500

Necessary formulas:
2 D S
EOQ  Q * 
H
4

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D Q
TC  S  H  CD
Q 2

We begin by the lowest price (70)

2  40000  500
EOQ   1690.3  3000  not acceptable
0.2  70
So we should now calculate the EOQ for unit price = 75

2  40000  500
EOQ   1633; 2000 1633  2999  not acceptable
0.2  75

So we should now calculate the EOQ for unit price = 80

2  40000  500
EOQ   1581.1; 1 1581.1  1999  acceptable
0.2  80

What next?! Is 1581.1 the EOQ? We don’t know. We should now calculate the total cost (TC) for 1581.1
and 2000 and 3000 (minimum order sizes considering lower unit prices 75 and 70). Then from 1581.1,
2000 and 3000, an order size with the lowest TC would be the optimal order quantity.
c)
40000 1581.1
TC(1581.1)  500  (0.2  80)  (80  40000)  3225298.2
1581.1 2
40000 2000
TC(2000)  500  (0.2  75)  (75  40000)  3025000
2000 2
40000 3000
TC(3000)  500  (0.2  70)  (70  40000)  2827666.7
3000 2
2827666.7 is the minimum TC*  82827666.7 & Q*  3000

b)
40000
The total holding costs = 3000 500  6666.7
3000
The total holding costs = (0.2  70)  21000
2

Facility Location (Nov. 2012)

A large Dutch retailer is considering where to locate its central warehouse to service its four local
warehouses in different cities of the Netherlands: Nijmegen, Valkenswaard, Amersfoort, Hoek van
Holland. The loads between these four cities and the central warehouse are respectively 180, 120, 550,
250.

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280

260

240

220

200

180
Amersfoort
y (KM) 160
(90, 145)
140
Hoek van Holland
120 (30, 110)

100
Nijmegen
80 (115, 100)

60

40 Valkenswaard
(95, 50)
20

0
0 20 40 60 80 100 120 140 160
x (KM)
a. Applying load-distance model which of the following cities are the best location for the central
warehouse?
 Utrecht (100, 120)
 Rotterdam (40, 105)

b. Applying the Centre of Gravity (COG) approach, determine the best location for the central
warehouse.

Solution:

a)

City Distance to Utr. Distance to Rott. d ij d ij l ij l ij × d ij l ij × d ij

(Utr.) (Rott.) (Utr.) (Rott.)
H.v.H. 100  30  120  110 40  30  105  110 80 15 250 20000 3750
Ams. 100  90  120  145 40  90  105  145 35 90 550 19250 49500
Nijm. 100  115  120  100 40  115  105  100 35 80 180 6300 14400
Valk. 100  95  120  50 40  95  105  50 75 110 120 9000 13200
Sum 54550 80850
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54550  80850  Utrecht is the best location for the central warehouse

b)

City Coordinates (x, y) li l i xi li yi

H.v.H. (30, 110) 250 7500 27500
Ams. (90, 145) 550 49500 79750
Nijm. (115, 100) 180 20700 18000
Valk. (95, 50) 120 11400 6000
Sum 1100 89100 131250

89100
xc. g .   81
1100
131250
y c. g .   119.3
1100

Forecasting (Jan. 2014)

The following data shows a company’s sale during the last ten months:

Month Sales (€)

1 125000
2 143000
3 125000
4 148000
5 133000
6 127000
7 134000
8 129000
9 136000
10 128000

a. Forecast the sales for months 11 using exponential smoothing (alpha = 0.8), and moving average
(n = 6).
b. Which method forecasts better? Why?

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Solution:

F(moving average; n = 6)

Ft 1   t
F(exp; α = 0.8) A
Month Sales (€): A Ft 1   At  (1   )Ft n
125000 125000 (for the first
period we assume that F
1 = A)
0.8  125000+0.2 
2 143000 125000 = 125000
3 125000 139400
4 148000 127880
5 133000 143976
6 127000 135195.2
(125000 +143000+ 125000
+148000 + 133000 +
127000) / 6
7 134000 128639 = 133500
8 129000 132927.8 135000
9 136000 129785.6 132666.7
10 128000 134757.1 134500
11 129351.4 131166.7
We can use MSE, MAD, and tracking signal to compare the forecasting methods. To do a fair comparison
we only consider periods 7-10, because only for these four periods both forecast are available.

MAD 
 actual  forecast
n

MSE 
 (actual  forecast )2
n
Tracking signal 
 actual  forecast 
MAD

MADExp = 5565.075
MADMA = 4083.325
MSEExp = 32111275
MSEMA = 22402722
Trackin SignalExp = 0.160016
Trackin SignalMA = -2.12246

According to these metrics we conclude that MA is better than Exp.

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Forecasting and Demand Planning (Nov. 2013)

Given the following dataset, use exponential smoothing with α = 0.4 and trend-adjusted exponential
smoothing with α = 0.4 and β = 0.1 to generate forecasts for periods 2 through 6 and discuss which model
works better.

Period Actual Forecast

1 450 450
2 400
3 320
4 300
5 450
6 500

Solution:

Exponential smoothing (Exp) Trend-adjusted exponential smoothing (FIT)

Ft 1   At  (1   )Ft FITt 1  S t Tt

where
S t   At  (1   )(S t 1 T t 1 )

T t   (S t  S t 1 )  (1   )T t 1

For the first period St and Tt are considered

as 450 and 0 respectively.

Period Actual Forecast Exp S T FIT

1 450 450 450 450 0 450
2 400 450 430 -2 450
3 320 430 384.8 -6.32 428
4 300 386 347.09 -9.46 378.48
5 450 351.6 382.58 -4.96 337.63
6 500 390.96 377.61

Ft 1   At  (1   )Ft FITt 1  S t Tt

where
F6 = 0.4*450 + (1-0.4)*351.6 S t   At  (1   )(S t 1 T t 1 )
= 390.96
T t   (S t  S t 1 )  (1   )T t 1

S5 = 0.4*450+(1-0.4)*(347.09-9.46) = 382.58
T5 = 0.1*(382.58-347.09)+(1-0.1)*(-9.46) = -4.96
FIT6 = 382.58 - 4.96 = 377.61

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Actual FIT Exp

550

500

450

400

350

300

250

200
1 2 3 4 5 6

We can use MSE, MAD, and tracking signal to compare the forecasting methods.

MAD 
 actual  forecast
n

MSE 
 (actual  forecast )2
n
Tracking signal 
 actual  forecast 
MAD

MADExp = 75.57
MADFIT = 78.54
MSEExp = 7261.38
MSEFIT = 7988.24
Trackin SignalExp = -0.51
Trackin SignalFIT = -0.02

According to these metrics we conclude that Exp is better than FIT.

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