ADC04 - Group 6

Inventory
Critical Thinking Exercises
1. To be competitive, many fast-food chains began to expand their menus to include a
wider range of foods. Although contributing to competitiveness, this has added to the
complexity of operations, including inventory management. Specifically, in what ways does
the expansion of menu offerings create problems for inventory management?
In any industry, inventory control is crucial, but in the food sector, this is especially true. The
complexity of inventory management rises as a result of the perishable nature of the goods.
Choosing their inventory levels is a difficult decision for fast food establishments. They will lose
money if they overstock since many of the things may spoil. Similarly to this, if there is a
shortage of supply, not all clients can be accommodated, and therefore they will transfer to other
restaurants. As a result, these eateries need to manage their stocks very carefully.
Each fast food company has a unique strategy for restocking its supplies. The top-selling
goods are often renewed as soon as the stock runs out, while orders for the remaining items are
made on a regular basis (every week, month, etc.). The restaurants have developed new
procedures that account for the consumption of particular commodities at particular times of the
day and fill their supplies appropriately. For instance: Lunchtime is when more sandwiches are
sold. As a result, the store would stock less bread at other times and more in the afternoon.
People don't always eat the same thing, hence the demand for food is quite erratic. Because
of this, demand forecasting is more difficult. Other issues including quality, freshness, and health
considerations must also be taken into account while stocking up. The issues of stock
replenishment for restaurants and suppliers have increased as a result of frequent menu changes.
Technology is increasingly being utilized to attempt to predict demand. The fast food businesses
are able to forecast more precisely thanks to improved data analysis technologies. 
All restaurants confront intense competition as a result of the sector's rapid growth, and
having a good inventory management system might be the difference between going out of
business and becoming the industry leader. To attain the highest performance, chains like
McDonald's, Subway, KFC, and others are continually enhancing their inventory management
systems. In any industry, inventory control is crucial, but in the food sector, this is especially
true. The complexity of inventory management rises as a result of the perishable nature of the
goods. Choosing their inventory levels is a difficult decision for fast food establishments. They
will lose money if they overstock since many of the things may spoil. Similar to that, if they run
out of goods, they can't serve everyone, therefore they'll migrate to other eateries. As a result,
these eateries need to manage their stocks very carefully.

2. As a supermarket manager, how would you go about evaluating the criticalness of

an inventory shortage?
A supermarket serves as a one-stop shop offering a variety of goods to consumers. Every
time customers shop, they anticipate finding the product of their choice in the supermarket. The
shop manager constantly faces the challenge of maintaining inventory for thousands of SKUs in
the supermarket.
Due to the following causes, inventory shortage is a highly serious problem in retail
management.
 Customer dissatisfaction - Lower level of customer service
 Business loss
As a supermarket manager, there are several ways to evaluate the criticalness of an inventory
shortage:
 Determine the inventory item's criticalness: You can evaluate the criticalness of the
inventory item based on its demand, cost, and availability. For example, if the item has high
demand, a high cost, and low availability, a shortage could be critical.
 Calculate the lead time: Evaluating the time it takes for a supplier to deliver a new order
of the inventory item is critical. If the lead time is too long, it would be difficult to restock the
shelves in time for customers.
 Use the ABC inventory control method: This method classifies inventory items based on
their value and criticalness. Class A items are the most critical, and you should keep them in
stock at all times to avoid shortages.
 Economic Order Quantity (EOQ): The EOQ method ensures that the right amount of
inventory is ordered and stocked at the appropriate time. This helps to ensure that there are no
shortages.
 By using these techniques to evaluate inventory shortage criticalness, you can quickly take
corrective actions to restock the shelves with items in the shortest supply.

3. Sam is at the post office to mail a package. After he pays for mailing the package, the
clerk asks if he would like to buy some stamps. Sam pauses to think before he answers. He
doesn't have a credit card with him. After paying for the package, he has about $30 in his
pocket. Analyze this from an inventory standpoint. Identify the relevant considerations.
Sam has $30 in his pocket to spend on stamps. Sam would be carrying some inventory in
case he decided to purchase the stamps. The amount invested in buying the stamps would come
under the holding cost. The cost of buying the stamps would come under the cost of ordering.
Sam should keep the following factors in mind while purchasing the stamps:

 Demand: Sam must decide whether stamps are in high demand in his daily life. Is he a
frequent user of stamps while shipping letters, invoices, or other items? Assessing demand will
assist him in determining whether acquiring stamps would be worthwhile.
 Inventory carrying costs: Sam must count the expense of transporting stamps as
inventory. This covers the purchase price, storage costs, and any possible losses due to theft,
damage, or obsolescence. These costs should be weighed against the potential benefits of having
stamps readily available.
 Budget: Another important factor to consider is Sam's budget. He had $30 in his pocket
after paying for the box, but no credit card on him. He must consider the cost of ordering stamps
and sensible use of his available funds because stamp purchases are not in his budget.
 Convenience: Sam should think about the convenience of buying stamps at the post
office. If he expects to require stamps regularly or appreciates the ease of purchasing them on the
spot, it may be beneficial for him to buy stamps at that time.
 Discounts: Sam should also note whether stamps are discounted at this time. And are
there any other discount times of the year when buying stamps?
 Future Availability: If Sam chooses not to buy stamps at the post office, he needs to
consider the potential availability of stamps in the future. He should assess whether it's easy to
find stamps elsewhere and plan accordingly.
 Alternatively: Sam could also explore alternative options for acquiring stamps. For example,
he could go to a local convenience store or another retail outlet that sells stamps. In addition, he
could purchase stamps online or use digital postage options. Evaluating the availability and
pricing of stamps in various regions could assist him in making an informed decision.

4. Give two examples of unethical conduct involving inventory management and the
ethical principle each one violates.
Following is a discussion of the two instances of unethical behavior in inventory
management:
 The first unethical practice in inventory management is giving clients false information
about the actual completion date of finished inventory. When a firm fails to fulfill its obligation
to deliver the inventory by a certain date, which happens frequently, it delivers notice in order to
collect the advance and the remaining amount from the company.  The ethical rule that has been
broken in this situation is the rule of justice for treating the customer fairly. 
 Lowering the final product's quality while raising the profit margin is the second
unethical practice in inventory management. Many businesses take advantage of the fact that the
client who ordered the inventory frequently is unable to assess the individual quality of each
finished product and lowers the quality of the final inventory. 
Nonmaleficence, a code of ethics that prohibits harming another party, is broken in this
scenario, and as a result, the other party suffers.
 Exercises
1. A manager receives a forecast for next year. Demand is projected to be 600 units for the
first half of the year and 900 units for the second half. The monthly holding cost is $2 per
unit, and it costs an estimated $55 to process an order.
a. Assuming that monthly demand will be level during each of the six-month periods
covered by the forecast (e.g., 100 per month for each of the first six months), determine an
order size that will minimize the sum of ordering and carrying costs for each of the six-month
periods.
 For the first 6-month period (Month 1 to Month 6)
Average monthly demand (D) = 600/6 = 100 (units)

EOQ ( Q¿ ) =
√ 2 DS
H
=
√2∗100∗55
2
=74 ( units )

 For the second 6-month period (Month 7 to Month 12)

Average monthly demand (D) = 900/6 = 150 (units)

EOQ ( Q¿ ) =
√ 2 DS
H
=
√2∗150∗55
2
=91 ( units )

b. Why is it important to be able to assume that demand will be level during each six-
month period?
In order to comprehend inventory management calculations and improve planning accuracy,
it is essential to assume that demand will remain constant. Managing inventory levels is easier
when demand is stable, making it possible to estimate demand properly. It also improves
customer service and decreases costs by preventing stockouts. Deriving the best order quantities
and inventory policies is further made simpler by the fact that it streamlines computations for
different inventory measurements and models.

c. If the vendor is willing to offer a discount of $10 per order for ordering in multiples of
50 units (e.g., 50, 100, 150), would you advise the manager to take advantage of the offer in
either period? If so, what order size would you recommend?
 For the first 6-month period (Month 1 to Month 6)
 D Q
Total monthly inventory cost ( TC )=Ordering cost+ Holding cost= S+ H
Q 2
D Q 100 74
TC ( Without Discount )= S+ H = ∗55+ ∗2=148.32
Q 2 74 2
Monthly Ordering Monthly Ordering Holding cost
Order
Demand Cost per Holding cost D Q Total cost
Size (Q) cost ( ∗S ) ( ∗H )
(D) order (S) per unit (H) Q 2

100 50.00 45 2 90 50 140

100 100.00 45 2 45 100 145
100 150.00 45 2 30 150 180

The total cost of the discount offer (Q = 50) is the least (Lower than EOQ without Discount).
Therefore, the company should go with a discount offer.
Recommended Order Size = 50 units.

 For the second 6-month period (Month 7 to Month 12)

D Q
Total monthly inventory cost ( TC )=Ordering cost+ Holding cost= S+ H
Q 2
D Q 150 91
TC ( Without Discount )= S+ H = ∗55+ ∗2=181.65
Q 2 91 2
Monthly Ordering Monthly Ordering Holding cost
Order
Demand Cost per Holding cost D Q Total cost
Size (Q) cost ( ∗S ) ( ∗H )
(D) order (S) per unit (H) Q 2

150 50.00 45 2 135 50 185

150 100.00 45 2 67.5 100 167.5
150 150.00 45 2 45 150 195

The total cost of the discount offer (Q = 100) is the least (Lower than EOQ without
Discount). Therefore, the company should go with a discount offer.
Recommended Order Size = 100 units.
 2. A food processor uses approximately 27,000 glass jars a month for its fruit juice
product. Because of storage limitations, a lot size of 4,000 jars has been used. Monthly holding
cost is 18 cents per jar, and reordering cost is $60 per order. The company operates an average
of 20 days a month.
Given
Demand per month = 27000 jars => Annual demand = 27000*12 = 324.000 (jars)
Present lot size = 4000 jars
Monthly holding cost = 0.18$ per jar => Annual holding cost = 0.18*12 = 2.16$ per jar
Reordering cost = 60$ per order
Number of working days = 20 days per month
a. What penalty is the company incurring by its present order size?
Calculate the Economic order quantity.

EOQ(Q¿ )=
√ 2 DS
H
=
√2∗324000∗60
2.16
=4243 ( units )

Calculate the Total inventory cost with Q*.

D
¿ Q¿ 324000 4243
TC = ¿ S+ H= ∗60+ ∗2.16=9164.1 $
Q 2 4243 2
As the lot size limitation is 40000 so we calculate the Total inventory cost with Q = 4000.
D Q 324000 4000
TC = S + H= ∗60+ ∗2.16=9180 $
Q 2 4000 2
Hence, the Annual penalty = TC - TC* = 9180 – 9164.1 = 15.9$ per year.

b. The manager would prefer ordering 10 times each month but would have to justify any
change in order size. One possibility is to simplify order processing to reduce the ordering cost.
What ordering cost would enable the manager to justify ordering every other day (i.e., 10 times
a month)?
Number of orders per month = 10 => Number of orders per year = 10*12 = 120 (orders).
Calculate Q: N = D/Q = 324000/Q = 120 => Q = 2700
Calculate Ordering cost.

Q=
√ 2 DS
H √
=
2∗324000∗S
2.16
=2700 → S=24.3 $

Therefore, manager can justify order size by reducing cost to 24.3$.

 3. A company is about to begin production of a new product. The manager of the
department that will produce one of the components for the product wants to know how often
the machine used to produce the item will be available for other work. The machine will
produce the item at a rate of 200 units a day. Eighty units will be used daily in assembling the
final product. Assembly will take place five days a week, 50 weeks a year. The manager
estimates that it will take almost a full day to get the machine ready for a production run, at a
cost of $300. Inventory holding costs will be $10 a year.
Given
Daily demand = 80 units => Demand for 1 week = 80 x 5 = 400 (units)
=> Annual demand (D) = 400 x 50 = 20000 (units)
Set-up cost (S) = $300/order
Annual Inventory holding cost (H) = $10/unit per year
a. What run quantity should be used to minimize total annual costs?
Economic order quantity is the run quantity to minimize the total annual cost.

EOQ(Q )=
¿
√
2 DS
H
=
√2∗20 000∗300
10
=1095 ( units )
Consequently, the run quantity to minimize the total annual cost is 1095 units.

b. How many days does it take to produce the optimal run quantity?
The machine will produce the item at a rate of 200 units a day.
Length of production run for the optimal run quantity = economic production quantity/
production per day = 1095/200 = 5.48 days.
Consequently, it will take 5.48 days to produce the optimal run quantity.

c. What is the average amount of inventory?

 Average inventory level = Q*/2 = 1,095 /2 = 548 (units).

d. If the manager wants to run another job between runs of this item, and needs a
minimum of 10 days per cycle for the other work, will there be enough time?
Cycle time = Q*/d = 1095/80 = 13.7 (days).
Number of days to produce of lot = 5.48 (days).
 The setup time is given as 1 day. Therefore, the idle time remaining in a cycle = 13.7 - 5.48 -
1 = 7.22 days which is less than 10 days. As a result, it can accommodate a job that requires 10
working days.

e. Given your answer to part d, the manager wants to explore options that will allow this
other job to be performed using this equipment. Name three options the manager can
consider.
1. Increase manufacturing rate by modifying the machine inside.
2. Divide the new task into two pieces and do it in two cycles back to back.
3. Produce a bit less during a given cycle and deviate from the ideal production run size to
accommodate the new work.

4. A company will begin stocking remote control devices. Expected monthly demand is 800
units. The controllers can be purchased from either supplier A or supplier B. Their price lists
are as follows:

Ordering cost is $40 and annual holding cost is 25 percent of unit price per unit. Which
supplier should be used and what order quantity is optimal if the intent is to minimize total
annual costs?
The Overall EOQ and Min Total Annual Cost for Supplier A
D = Annual Demand = 800 x 12 = 9600
H = Holding Cost Per Unit Per Annual = 0.25 x P 
As the holding cost is 25% of the unit price, we get the holding cost for different unit prices
as mentioned in the below table:

Option Plan Order Quantity (Units) Cost/Unit (P) Holding Cost (H)

A 1-199 14.00 3.50

 B 200-499 13.80 3.45

C 500 and more 13.60 3.40

Where P = Unit Purchase Price and H = P x 0.25

 The EOQ level given the least holding cost = 3.4$

EOQ(Q )=
¿

√ 2 DS
H
=
√2∗96 00∗4 0
3.4
=475.27 ( units )

=> This is not a feasible EOQ level, because for the holding cost of 3.4$, ordering quantities
must be 500 or more units
 The EOQ level given the second least holding cost = 3.45$

EOQ(Q¿ )=
√ 2 DS
H
=
√2∗9600∗40
3.4 5
=47 1. 81 ( units )

=> This is a feasible EOQ level, because, 471.81 (~472) units fall within the range of 200 to
499 units where holding cost = 3.45$ => Choose (2).
The total inventory cost for the order quantity of 471.81 units and 500 units is:
D Q 96 00 4 72
TC ( 13.8 ) = S+ H + P∗D= ∗4 0+ ∗3.45+13.8∗9600=134.108 $
Q 2 4 72 2
D Q 9600 500
TC ( 13. 6 )= S+ H + P∗D= ∗40+ ∗3.4+13. 6∗9600=13 2 .17 8 $
Q 2 500 2
=> For supplier A, overall economic order quantity (EOQ) is 500 units with the minimum
total annual cost is $132,178

The Overall EOQ and Min Total Annual Cost for Supplier B
Similar to supplier A case, D = Annual Demand = 800 x 12 = 9600
H = Holding Cost Per Unit Per Annum = 0.25 x P 
As the holding cost is 25% of the unit price, we get the holding cost for different unit prices

Option Plan Order Quantity (Units) Cost/Unit (P) Holding Cost (H)

A 1-149 14.10 3.53

 B 150-349 13.90 3.48

C 350 and more 13.70 3.43

Where P = Unit Purchase Price and H = P x 0.25

The EOQ level given the least holding cost = 3.43$

EOQ(Q )=
¿

√ 2 DS
H
=
√2∗9600∗40
3.4 3
=47 3. 53 ( units )

=> This is a feasible EOQ level, because, 473.53 units fall in the range of 350 and more units
where holding cost = 3.43$.
The total inventory cost for the order quantity of 473.53 (~474) units and 500 units is:
D Q 9600 47 4
TC ( 13.8 ) = S+ H + P∗D= ∗40+ ∗3.4 3+13. 7∗9600=133.143 $
Q 2 47 4 2
Thus, for supplier B, overall EOQ = 473.53 units, and the total min annual cost = 133.143$.
Conclusion: Hence, comparing the supplier A and B, we may conclude that Supplier A
should be selected. Moreover, the overall EOQ would be 500 units for the total Min.
Annual Cost of $132.178.

5. The demand for a type of inventory during the order period is as follows:
Demand 50 60 70 80 90 100 110
Frequency of
occurrence
3 9 13 30 22 12 11
(number of
times)

 Holding cost: 15,000 VND/unit/year

 Shortage cost: 9,000 VND/unit/year
 Number of orders in a year: n = 5 times
 Determine the reorder point for this type of inventory.

Demand 50 60 70 80 90 100 110

 Frequency of 3 9 13 30 22 12 11
occurrence

Probability 3% 9% 13% 30% 22% 12% 11%

% Availability 3% 12% 25% 55% 77% 89% 100%

% Stockout 97% 88% 75% 45% 23% 11% 0

Safety Stock 0 10 20 30

0 150.00 300.00 450.00

(Risk) Holding cost
0 0 0

355.50 153.00 49.500 0

(Risk) Shortage cost
0 0

355.50 303.00 349.50 450.00

Total cost
0 0 0 0

From the table above, a safety stock of 10 frames gives the lowest total cost (303.000 VND),
so that safety stock = 10
Demand per day in year (d) = Total demand/Total number of times = 5.6
Lead time for a new order in days (L) = Total number of times/Number of orders = 20
=> Reorder point (ROP) = d*L + safety stock = 112 + 10 
=> Reorder point (ROP) = 122 (frames)