Roll No Name

112 Movin Crasto

a. What is the sample mean and sample variance of the set?

Ans:
Number Of MX332
Month ordered
June 25
July 31
August 18
Septembe
r 22
October 40
November 19
December 38
January 21
February 25
March 36
April 34
May 28
June 27
Mean 28
Variance 53.16666667
Std. Dev 7.291547618

b. What is the inventory policy that American Aerospace should implement for part 10003487?

Ans: As per the case , we are of the opinion that American Aerospace should implement the Re-
order Point , Order-Quantity Policy ( R,Q) Model , because of the following assumptions :-

1) Part 10003487 inventory appears to be a stable/critical product and is under continuous

review.
 2) No lead time for Part 10003487 by itself , however the lead time of one and a half months and
the corresponding delay is due to that of the other steel parts. This lead time is considered in
our workings below.
3) The demand of Part 10003487 is equal to the demand of MX332 jet engines , since it is
exclusively used for this type of jet engines. Therefore the assumption is that the part is
normally distributed with a mean and Variance of 28 & 53.1667 as per answer a.
4) Fixed set up cost K = 5,800 and holding cost h= 750 and shortage cost p = 3,250

Average Demand Yearly = Mean * 12 months

D = 28 * 12 = 336

There for Average Demand for Lead time of One & Half Months = Mean * 1.5 months

D = 28 * 1.5 = 42

& Standard Deviation = 7.29154761807579 * 1.5 = 10.9373214271137

Average Demand per Unit Time D 336

Set Up Cost K 5800
Unit Holding Cost h 750
unit Shortage Cost p 3250
Service Level L 0.85

From the above : Order Quantity (Q ) = Sqrt of ( 2*D*K) / h) * Sqrt of ( ( p+h)/p) = 79.97538

Re-order Point ( R ) = a + L (b-a) = 53.3358

To Summarise American Aero space should implement the (R,Q) model with rounded off values
of Q = 80 & R=53

c. What are the average annual holding costs and set up costs as associated with this inventory
policy.

Average inventory Cost before Order Arrives = R -Average Demand for Lead time = 53-42 = 11

Average inventory Cost After Order has Arrived = Average inventory Cost before Order Arrives + Q

= 11+80 = 91
Therefore Average Inventory Level = (11+91)/2 = 51

Hence Average Yearly Holding Cost = 51 * Unit Holding Cost = 51 * 750 = 38,250

Average number of set ups per year = Average Demand Yearly / Q = 336 / 80 = 4.2

Hence Average Yearly Set Up Cost = 4.2 * Set Up Cost = 4.2 * 5800 = 24,360

d. How do the average annual holding costs and set up costs change if the desired probability that
a shortage will not occur between the time an order is placed and the time the order is
delivered is increased to 0.95

New L = 0.95 and hence the revised table below and revised values of Q & R

Average Demand per Unit Time D 336

Set Up Cost K 5800
Unit Holding Cost h 750
unit Shortage Cost p 3250
Service Level L 0.95

Using similar formulas as used in solution to question c : Q = 80 & R = 60 ( Rounded Off )

Average inventory Cost before Order Arrives = 60-42 = 18

Average inventory Cost After Order has Arrived = 18+80 = 98

Therefore Average Inventory Level = (18+98)/2 = 58

Hence Average Yearly Holding Cost = 58 * Unit Holding Cost = 58 * 750 = 43,500

Average number of set ups per year = 336 / 80 = 4.2

Hence Average Yearly Set Up Cost = 4.2 * Set Up Cost = 4.2 * 5800 = 24,360
No Change in Average Yearly Set Up Cost while there is an increase in Average Yearly Holding Cost

e. Do you think Scarlett’s independent analysis of each stationary part could generate inaccurate
inventory policies ? Why or Why Not

Scarlett’s independent analysis of stationary part 10003487 is justified since only a single jet engine that
needs this part and this part is the one causing the lead time in the process .

However in most cases stationary parts would be used for multiple jets and the lead time due to this
stationary part affects the demand for other parts as well . Hence the interdependency cannot be
analyzed correctly performing an independent analysis of each stationary part. Hence it can be said that
Scarlett’s approach of independent part analysis may be inaccurate for other stationary parts.

f . Scarlett knows that the aerospace industry is very cyclical – the industry experiences several years of
high sales , several years of mediocre sales and several years of low sales . How would you recommend
incorporating this fact into the analysis.

Ans: Forcasting method could be used.