INVENTORY MANAGEMENT – SEMESTER 01 – 2022-2023

HOMEWORK 7

Question 1:
An electronics company has two contract manufacturers in Asia: Foxconn assembles its tablets
and smart phones and Flextronics assembles its laptops. Monthly demand for tablets and
smartphones is 10,000 units, whereas that for laptops is 4,000. Tablets cost the company $100,
laptops cost $400, and the company has a holding cost of 25 percent. Currently the company has
to place separate orders with Foxconn and Flextronics and receives separate shipments. The
fixed cost of each shipment is $10,000. What is the optimal order size and order frequency with
each of Foxconn and Flextronics?

Question 2:
Harley purchases components from three suppliers. Components purchased from Supplier A are
priced at $5 each and used at the rate of 20,000 units per month. Components purchased from
Supplier B are priced at $4 each and are used at the rate of 2,500 units per month. Components
purchased from Supplier C are priced at $5 each and used at the rate of 900 units per month.
Currently, Harley purchases a separate truckload from each supplier. As part of its JIT drive,
Harley has decided to aggregate purchases from the three suppliers. The trucking company
charges a fixed cost of $400 for the truck with an additional charge of $100 for each stop. Thus,
if Harley asks for a pickup from only one supplier, the trucking company charges $500; from two
suppliers, it charges $600; and from three suppliers, it charges $700. Suggest a replenishment
strategy for Harley that minimizes annual cost. Assume a holding cost of 20 percent per year.
Compare the cost of your strategy with Harley’s current strategy of ordering separately from each
supplier. What is the cycle inventory of each component at Harley?

Question 3:
A BMW dealership has k = 4 retail outlets serving the entire Chicago area (disaggregate option).
Weekly demand at each outlet is normally distributed, with a mean of D = 25 cars and a standard
deviation of D = 5. The lead time for replenishment from the manufacturer is L = 2 weeks. Each
outlet covers a separate geographic area, and the correlation of demand across any pair of areas
is ρ. The dealership is considering the possibility of replacing the four outlets with a single large
outlet (aggregate option). Assume that the demand in the central outlet is the sum of the demand
across all four areas. The dealership is targeting a CSL of 0.90. Compare the level of safety
inventory needed in the two options as the correlation coefficient for the following cases:

• Case 1: ρ = 0
• Case 2: ρ = 0.8
• Case 3: ρ = 1
• Case 4: ρ = −0.6

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