Question 2: FishEyes Transportation (25% marks)

Fisheye is a company which produces high quality packed food and need to ship their
products from their factories to their destinations while minimizing the cost of the
transportation. They have two factories, two Distribution Centres (DCs) and three
destinations. The products can move from any factory to any DC or destinations.
Also, the products can move from DCs to destinations. If the transportation is done
between a factory and a destination, then it is done by train and there is a 1500
pallets capacity on the flow. However, if the products are being transported from a
factory to a DC, or a DC to a destination, then we have a 72 pallets capacity on the
flow. Table 2 shows the description of production, demand and costs. Please not that
if there is no cost associated with an arc in description table, then transport within
the arc is no feasible. Now please:

(a) Find the minimum cost route and total cost of the transportation (70% of the marks
for this section)

To find the minimum cost route and total cost of transportation, we can formulate
the problem as a linear programming problem. Let's define the decision variables
and constraints based on the given information.

Decision Variables:
Let:
x1: Number of pallets transported from F1 to D1
x2: Number of pallets transported from F1 to D2
x3: Number of pallets transported from F1 to DC1
x4: Number of pallets transported from F1 to DC2
x5: Number of pallets transported from DC1 to D1
x6: Number of pallets transported from DC1 to D2
x7: Number of pallets transported from DC1 to D3
x8: Number of pallets transported from DC2 to D1
x9: Number of pallets transported from DC2 to D2
x10: Number of pallets transported from DC2 to D3
x11: Number of pallets transported from F2 to DC1
x12: Number of pallets transported from F2 to DC2
x13: Number of pallets transported from F2 to D2

Objective Function:

Minimize the total cost of transportation:

Cost = 80x1 + 120x2 + 30x3 + 20x4 + 40x5 + 50x6 + 80x7 + 70x8 + 20x9 + 40x10 +
60x11 + 30x12 + 100x13

Constraints:
Production Constraints:

1
x1 + x2 + x3 + x4 ≤ 140 (Factory F1 production)
x11 + x12 + x13 ≤ 110 (Factory F2 production)

Demand Constraints:
x1 + x5 + x8 = 100 (Demand at D1)
x2 + x6 + x9 = 70 (Demand at D2)
x7 + x10 = 80 (Demand at D3)

Capacity Constraints:

x1 + x2 + x3 + x4 ≤ 1500 (Train capacity from F1 to destinations)

x3 + x4 + x11 + x12 ≤ 72 (Capacity from F1 to DCs and F2 to DCs)
x5 + x6 + x7 ≤ 72 (Capacity from DC1 to destinations)
x8 + x9 + x10 ≤ 72 (Capacity from DC2 to destinations)

Non-negativity Constraints: x1, x2, x3, x4, x5, x6, x7, x8, x9, x10, x11, x12, x13 ≥ 0

The problem has been formulated in Excel-Solver and solved. The formulation has
been presented below:

2
The minimum route calculated is as follows:

F1 D1
F2 D2
DC1 D2
DC2 D3

The total cost of transportation is $15,320.

(b) Draw the graph for this transportation problem and explain the process in detail
(30% of the mark for this section)

To draw the graph for the transportation problem, we can use a network diagram that
represents the different nodes (factories, distribution centers, and destinations) and the arcs
(transportation routes) between them. Here's how you can construct the graph and explain
the process:

1. Identify the nodes:

- Factories: F1, F2
- Distribution Centers: DC1, DC2
- Destinations: D1, D2, D3

2. Draw the nodes on the graph:

- Use circles or squares to represent the nodes. Label each node with its
respective identifier (F1, F2, DC1, DC2, D1, D2, D3).

3. Determine the arcs and their capacities:

- Determine the possible transportation routes between nodes based on
the given constraints.
- Assign the capacities to the arcs according to the capacity constraints.

3
 - Use directed arrows to represent the arcs, indicating the direction of
transportation.

4. Label the arcs with their respective costs:

- Write the cost of transportation on each arc according to the given cost
information.

5. Add the production and demand information to the respective nodes:

- Label the factories (F1, F2) with their production capacities.
- Label the destinations (D1, D2, D3) with their demand quantities.

6. Connect the nodes and arcs:

- Draw lines to connect the nodes based on the arcs and their capacities.
- Ensure that the lines correspond to the transportation routes and their
respective capacities.

7. Finalize the graph:

- Review the graph to ensure all nodes, arcs, capacities, costs, production,
and demand quantities are correctly represented.
- Add a title to the graph, labels to the axes (if applicable), and any other
necessary details.

Once the graph is constructed, you can visually analyze it to understand the transportation
routes, capacities, costs, and the overall structure of the transportation problem. It provides
a clear representation of how the products can move between different nodes in the
network.

4
 Table 1 Production, demand and cost of transportation

Production and demand Costs

F1: 140 pallets production F1-D1 = 80$ per pallet
F2: 110 pallets production F1-D2 = 120$ per pallet
DC1: 0 pallets F1-DC1 = 30$ per pallet
F1-DC2 = 20$ per pallet
DC2: 0 pallets
DC1-D1 = 40$ per pallet
D1: 100 pallets demand
DC1-D2 = 50$ per pallet
D2: 70 pallets demand DC1-D3 = 80$ per pallet
D3: 80 pallets demand DC2-D1 = 70$ per pallet
DC2-D2 = 20$ per pallet
DC2-D3 = 40$ per pallet
F2-DC1 = 60$ per pallet
F2-DC2 = 30$ per pallet
F2-D2 = 100$ per pallet

Question 3: EOQ and safety stock Case (25% marks)

(a) Please explain:

 the importance of considering safety stocks in inventory management (5% of the
mark for this section).

Safety stocks are a crucial aspect of inventory management that serve as a buffer
against uncertainty and variability in demand and supply. Here are a few key reasons
why considering safety stocks is important:

1. Demand Variability: Safety stocks help meet unexpected spikes in demand

when actual demand exceeds forecasted demand due to factors such as
seasonality, market trends, or unforeseen events (Chopra & Meindl, 2016).

2. Supply Variability: Safety stocks bridge the gap between expected and actual
supply, ensuring uninterrupted operations in case of supplier issues,
production problems, or disruptions (Silver, Pyke, & Peterson, 1998).

3. Lead Time Variability: Safety stocks absorb longer lead times caused by
shipping delays, customs clearance, or logistical issues, minimizing stockouts
during extended lead times (Monczka, Handfield, Giunipero, & Patterson,
2015).

4. Uncertainty and Risk Mitigation: Safety stocks act as a buffer against

uncertainties and risks, reducing the frequency and impact of stockouts and
maintaining customer satisfaction (Cachon & Terwiesch, 2019).

5. Cost-Effectiveness: While safety stocks incur carrying costs, they are more
cost-effective than stockouts, which can lead to lost sales, expedited

5
 shipping costs, and damage to the company's reputation (Chopra & Meindl,
2016).

 What is the application of desired re-order point? (5% of the mark for this
section)
The desired reorder point is the inventory level at which a new order should be
placed to replenish stock before it reaches a critically low level. Its application is as
follows:

1. Inventory Replenishment: The desired reorder point triggers the

replenishment process when the inventory level reaches a specific
threshold, ensuring timely restocking (Silver et al., 1998).

2. Demand and Lead Time Variability: The desired reorder point considers
expected demand during the lead time required to replenish stock, ensuring
sufficient inventory to meet customer demand during replenishment
(Cachon & Terwiesch, 2019).

3. Safety Stock Considerations: The desired reorder point incorporates safety

stock by adding it to the expected demand during the lead time, reducing
the risk of stockouts (Chopra & Meindl, 2016).

4. Order Point Optimization: The desired reorder point can be optimized by

analyzing historical data, demand patterns, and lead time variations to
minimize stockouts and excess inventory (Monczka et al., 2015).

5. Efficient Inventory Management: The desired reorder point helps balance

carrying costs and stockouts, optimizing working capital and customer
service levels (Chopra & Meindl, 2016).

(b) A Pharmaceutical retailer company uses a continuous review system for managing the
inventory of their products. One of the products this company distributes to the
customer, is a specific type of syringe equipment for administrating high volume
injections. The weekly demand for this product is 80 units with standard deviation of 10
units. The ordering and setup cost for this product is £50 per order. The annual holding
cost for this product is £20 per unit. The orders have a lead time of 3 weeks and the
desired Cycle-service level for this company is 98%.

Please find and include calculations:

 Economic Order Quantity (EOQ) for this product. (30% of the mark for this section)

Economic Order Quantity is a formula used in inventory management to determine

the optimal order quantity that minimizes the total cost associated with inventory.
EOQ takes into account the trade-off between ordering costs and holding costs.

The basic idea behind EOQ is to find the order quantity that balances the cost of
placing orders (ordering and setup costs) with the cost of holding inventory (holding
or carrying costs). The goal is to minimize the total cost of inventory management
while ensuring an adequate supply of products.

6
To calculate the Economic Order Quantity (EOQ) for the product, we need the
following information:

Demand per week (D) = 80 units

Standard deviation of demand per week (σ) = 10 units
Ordering and setup cost (S) = £50 per order
Annual holding cost per unit (H) = £20 per unit
Lead time (L) = 3 weeks
Cycle-service level (CSL) = 98% (which implies a service level of 0.98)

The formula to calculate EOQ is:

EOQ = √ ¿ ¿ ¿

Now, let's plug in the values and calculate EOQ:

EOQ = √ ¿ ¿ ¿

EOQ = √ ¿ ¿ ¿

EOQ = 20 units
Therefore, the Economic Order Quantity (EOQ) for this product is 20 units.

 What is the desired safety stock? (30% of the mark for this section)

The desired safety stock is a quantity of inventory that is held in addition to the average
inventory level to provide a buffer against uncertainties in demand and supply. It serves as a
contingency stock to protect against unexpected events such as variations in customer
demand, supply disruptions, or lead time fluctuations. The purpose of the desired safety
stock is to ensure that the company can meet customer demand even during periods of
higher-than-expected demand, longer-than-expected lead times, or supply disruptions.

The desired safety stock is determined based on factors such as the desired cycle-service
level (the desired level of customer service), lead time variability, demand variability, and
the acceptable level of risk. By setting an appropriate level of safety stock, companies aim to
minimize the risk of stockouts, maintain customer satisfaction, and avoid potential costs
associated with lost sales, expedited shipping, or damage to the company's reputation.

Demand per week (D) = 80 units Standard deviation of demand per week (σ) = 10 units Lead
time (L) = 3 weeks Cycle-service level (CSL) = 98% (which implies a service level of 0.98)

First, we need to calculate the demand during the lead time (DLT) using the formula:

DLT = D * L
DLT = 80 units/week * 3 weeks = 240 units

Next, we calculate the safety stock (SS) using the formula:

7
SS = Z * σ * √L

Where Z is the Z-score corresponding to the desired cycle-service level.

Using the standard normal distribution table or calculator, we find that the Z-score for a 98%
service level is approximately 2.33.
SS = 2.33 * 10 units * √3
SS = 2.33 * 10 units * 1.732
SS = 40.36 units (rounded to 2 decimal places)

Therefore, the desired safety stock for this product is approximately 40.36 units.

 What is the desired reorder point R for this product? (30% of the mark for this
section)

To calculate the desired reorder point (R) for the product, we need the following
information:
Demand per week (D) = 80 units
Standard deviation of demand per week (σ) = 10 units
Lead time (L) = 3 weeks
Cycle-service level (CSL) = 98% (which implies a service level of 0.98)

The desired reorder point (R) can be calculated using the formula:
R = D * L + Z * σ * √L

Where: D = Demand per week

L = Lead time in weeks
Z = Z-score corresponding to the desired cycle-service level
σ = Standard deviation of demand per week

Let's calculate the desired reorder point:

Given values: D = 80 units L = 3 weeks Z-score for a 98% service level = 2.33 σ = 10 units

R = (80 * 3) + (2.33 * 10 * √3)

R = 240 + (2.33 * 10 * 1.732)
R ≈ 240 + 40.36
R ≈ 280.36 units

Therefore, the desired reorder point (R) for this product is approximately 280.36 units.

References:
1. Chopra, S., & Meindl, P. (2016). Supply chain management: Strategy, planning, and
operation. Pearson.
2. Cachon, G. P., & Terwiesch, C. (2019). Matching supply with demand: An
introduction to operations management. McGraw-Hill Education.
3. Monczka, R. M., Handfield, R. B., Giunipero, L. C., & Patterson, J. L. (2015).
Purchasing and supply chain management. Cengage Learning.
4. Silver, E. A., Pyke, D. F., & Peterson, R. (1998). Inventory management and
production planning and scheduling. John Wiley & Sons.

8
9