Operations management

Individual Assignment 4: Chapter 7 and Chapter 8

Solution
----------------------------------------------------------------------------------------------------------------------------------------

Chapter 7

1. Discuss, in general, the differences in the supply chains of service providers and manufacturing companies.
Solution
Some service providers actually incorporate manufacturing aspects, for example, a restaurant “assembles” menu
items from raw materials and parts (food items), and provides the customer with a final product. A hospital takes
an “unfinished” product (a patient) and then it flows through a set of processes to produce an end result. As a
result, there aren’t as many “differences” in SCM between manufacturing operations and some types of service
providers. A “pure” service provider like a hotel, while not “assembling” a product will still include supply
chain processes like procurement, quality management, scheduling, etc., and the same approaches to efficient
management of these processes will apply.

2. Describe the supply chain for your university or college. Who are the suppliers, producers, and distributors in
this supply chain? Are there different supplier tiers? How would you evaluate this supply chain? Does inventory
even exist, and if it does, what form does it take?
Solution
Universities have traditional suppliers for MRO (Maintenance, Repair and Operations) goods like supplies,
telephone and computer services, furniture, maintenance equipment and products, food and beverages, etc. They
also have non-traditional suppliers like high schools that provide students. The producers are the teachers and
other academic and support services that educate the student and provide for daily student life and well-being.
Distributors include placement services and companies and organizations students are hired by. Inventory exists
for MRO goods and services. Students are also a form of inventory as are classrooms, dorm rooms, parking
spaces, etc. Students as inventory incur a carrying cost. The longer a student remains in school the greater the
cost to the institution or state. Not only is there a direct cost for maintaining a student, but a student who stays
too long also takes up a spot for other incoming students, thus creating shortages of facilities like dorm rooms
and classrooms, which in-turn require expenditures for capital expansion.

3. Discuss why single-sourcing is attractive to some companies?

Solution
A few suppliers or carriers are easier to coordinate. If a company gives one or two suppliers all of their business,
they can be more demanding on quality and deliveries. Single-sourcing provides the supplier or carriers with
economy of scale that enables them to reduce costs.

4. The PM Computer Company makes build-to-order (BTO) computers at its distribution center year-round. The
following tables shows the average value (in $ millions) of component parts, work-in-process, and finished
computers at the DC for the past four years:
Year
1 2 3 4
Component parts $20.5 27.8 30.8 37.3
Work-in-process 4.2 6.7 7.1 9.5
Finished computers 3.6 7.2 8.6 10.1
Cost of goods sold 226.0 345.0 517.0 680.0
a. Determine the number of inventory turns and the days of supply for each year.
b. As the company has grown, does it appear that the company’s supply chain performance has improved?
Explain your answer.

Solution
a. Year 1: Inventory Turn = (226.0 / (20.5+4.2+3.6)) = 226.0 / 28.3 = 7.98
Days of supply = ((20.5+4.2+3.6) / 226.0) x 365 = 45.70
Year 2: Inventory Turn = (345.0 / (27.8+6.7+7.2)) = 345.0 / 41.7 = 8.27
Days of supply = ((27.8+6.7+7.2) / 345.0) x 365 = 44.12
Year 3: Inventory Turn = (517.0 / (30.8+7.1+8.6)) = 517.0 / 46.5 = 11.12
Days of supply = ((30.8+7.1+8.6) / 345.0) x 365 = 32.83
Year 4: Inventory Turn = (680.0 / (37.3+9.5+10.1)) = 680.0 / 56.9 = 11.95
Days of supply = ((37.3+9.5+10.1) / 345.0) x 365 = 30.54
b. The company’s supply chain performance has marginally improved. However, the increasing in inventory turn seems
to be slow in a last two-year.
5. Delph Manufacturing Company is going to purchase an auto parts component from one of two competing
suppliers. Delph is going to base its decision, in part, on the supply chain performance of the two suppliers. The
company has obtained the following data for average raw materials, work-in-process, and finished goods
inventory value, as well as cost of goods sold for the suppliers:
Supplier 1 Supplier 2
Cost of goods sold $8,360,000 $14,800,000
Raw materials 275,000 870,000
Work-in-process 62,000 550,000
Finished goods 33,000 180,000
Each company operates 52 weeks per year.
Determine which supplier has the best supply chain performance according to inventory turns and weeks
of supply. What other factors (in your opinion) would the company likely take into account is selecting a
supplier?

Solution
Supplier 1 : Inventory Turn = (8,360,000 / (275,000+62,000+33,000)) = 8,360,000 / 370,000 = 22.59
Days of supply = ((275,000+62,000+33,000) / 8,360,000) x 52 = 2.30
Supplier 2 : Inventory Turn = (14,800,000 / (870,000+550,000+180,000)) = 14,800,000 / 1,600,000 = 9.25
Days of supply = ((870,000+550,000+180,000) / 14,800,000) x 52 = 5.62

Supplier 1 has the better supply chain performance. Other factors that might influence Delph could be capacity, quality,
and delivery speed.

Chapter 8

1. Describe the difference between independent and dependent demand and give an example of each for a pizza
restaurant such as Pizza Hut or Pizza Company.

Solution
In general, independent demand items are final or finished products that are not dependent upon internal
production activity; that is, the demand is usually external and beyond the direct control of the organization.
Alternatively, dependent demand is usually a component part or material used to produce a final product. An
example of independent demand for a pizza restaurant would be a final product such as a pizza, whereas
dependent demand would be any of the ingredients (cheese, tomato sauce, dough, etc.) and perhaps
complementary items such as drinks.

2. Distinguish between a fixed-order-quantity system and fixed-time-period system and give an example of each.
Solution
In a fixed-order-quantity system, an order is placed for the same constant amount whenever the inventory on
hand decreases to a certain level, whereas in a fixed-time-period system, an order is placed for a variable amount
after an established passage of time.

3. The Wallace Stationary Company purchases paper from the Seaboard Paper Company. Wallace produces
stationary that requires 1,415,000 square yards of paper per year. The cost per order for the company is $2,200;
the cost of holding one yard of paper in inventory is $0.08 per year. Determine the following:
a. Economic order quantity
b. Minimum total annual cost
c. Optimal number of orders per year
d. Optimal time between orders

Solution

D = 1, 415, 000
Co = $2, 200
Cc = $0.08
2Co D
a. Q=
Cc
2 ( 2, 200 )(1, 415, 000 )
= = 278,971.3 yd
0.08
 Co D CcQ
b. TC = +
Q 2

=
( 2, 200 )(1, 415, 000 ) +
( 0.08)( 278,971.3)
278,971.3 2
= $22,317.71
D 1, 415,000
c. = = 5.07 per year
Q 278,971.3
365
d. = 72.0 days
5.07

4. Kelly’s Tavern serves Shamrock draft beer to its customers. The daily demand for beer is normally distributed,
with an average of 20 gallons and a standard deviation of 4 gallons. The lead time required to receive an order of
beer from the local distributor is 12 days. Determine the safety stock and reorder point if the restaurant wants to
maintain a 90% service level. What would be the increase in the safety stock if a 95% service level were desired?

Solution
d = 20
d = 4
L = 12
Z = 1.28
R = dL + Z d L
= (20)(12) + 1.28(4) sqrt (12)
= 257.87 gal
Safety stock =17.87 gal.
For service level of 95%
Z = 1.65
R = 262.86 gal
Safety stock = 22.86 gal.

5. KVS Pharmacy fills prescriptions for a popular children’s antibiotic, Amoxycilin. The daily demand for
Amoxycilin is normally distributed with a mean of 200 ounces and a standard deviation of 80 ounces. The
vendor for the pharmaceutical firm that supplies the drug calls the drugstore’s pharmacist every 30 days and
checks the inventory of Amoxycilin. During a call the druggist indicated that store had 60 ounces of the
antibiotic in stock. The lead time to receive an order is four days. Determine the target inventory level and the
order size that will enable the drugstore to maintain a 99% service level.

Solution
d = 200
tb = 30
L=4
 d = 80
I = 60
Q = d ( tb + L ) + Z d tb + L − I
= 200 ( 30 + 4 ) + 2.33 ( 80 ) 30 + 4 − 60
= 7,826.89oz
6. The Aztec Company stocks a variety of parts and materials it uses in its manufacturing process. Recently, as
demand for its finished goods has increased, management has had difficulty managing parts inventory; they
frequently run out of some crucial parts and seem to have as endless supply of others. In an effort to control
inventory more effectively, they would like to classify their inventory of parts according to the ABC approach.
Following is a list of selected parts and the annual usage and unit value for each:

Item No. Annual Usage Unit Cost ($) Item No. Annual Usage Unit Cost ($)
1 36 350 16 60 610
2 510 30 17 120 20
3 50 23 18 270 15
4 300 45 19 45 50
5 18 1900 20 19 3200
6 500 8 21 910 3
7 710 4 22 12 4750
8 80 26 23 30 2710
9 344 28 24 24 1800
10 67 440 25 870 105
11 510 2 26 244 30
12 682 35 27 750 15
13 95 50 28 45 110
14 10 3 29 46 160
15 820 1 30 165 25
Classify the inventory items according to the ABC approach using dollar value of annual demand.

Solution

% %
Unit Annual Annual Annual
Item Usage Cost Usage Value Usage Class
25 870 105 $91,350 15.97% 10.43% A
23 30 2,710 81,300 14.21 0.36 A
20 19 3,200 60,800 10.63 0.23 A
22 12 4,750 57,000 9.97 0.14 A
24 24 1,800 43,200 7.55 0.29 A
16 60 610 36,600 6.40 0.72 A
5 18 1,900 34,200 5.98 0.22 A
10 67 440 29,480 5.15 0.80 B
12 682 35 23,870 4.17 8.18 B
2 510 30 15,300 2.68 6.11 B
4 300 45 13,500 2.36 3.60 B
1 36 350 12,600 2.20 0.43 B
27 750 15 11,250 1.97 8.99 B
9 344 28 9,632 1.68 4.12 B
29 46 160 7,360 1.29 0.55 B
26 244 30 7,320 1.28 2.92 B
28 45 110 4,950 0.87 0.54 B
13 95 50 4,750 0.83 1.14 C
30 165 25 4,125 0.72 1.98 C
18 270 15 4,050 0.71 3.24 C

6 500 8 4,000 0.70 5.99 C

7 710 4 2,840 0.50 8.51 C
21 910 3 2,730 0.48 10.91 C
17 120 20 2,400 0.42 1.44 C
19 45 50 2,250 0.39 0.54 C
8 80 26 2,080 0.36 0.96 C
3 50 23 1,150 0.20 0.60 C
11 510 2 1,020 0.18 6.11 C
15 820 1 820 0.14 9.83 C
14 10 3 30 0.01 0.12 C
8,342 571,957 100.00% 100.00%