OPERATIONS MANAGEMENT B3401

ASSIGNMENT # 3 (Total 100 points)

Due on Nov 24 at 5pm, 2022
(Write your name, student #, section # in which you are registered)

Q1. (Total 40 points)

A manufacturer of exercise equipment purchases the pully section of the equipment from a
supplier who lists these prices: less than 1000, $5 each; 1,000 to 3,999, $4.95 each; 4,000 to
5,999, $4.9 each; and 6,000 or more, $4.85 each. Ordering costs are $50 per order, annual
carrying costs are 40 percent of the purchase cost, and annual usage is 4,900 pulleys. Determine
an order quantity that will minimize the total cost (Ordering + Holding + Purchase).

Q2. (Total 60 points)

Harvey’s Specialty Shop is a popular spot that specializes in international gourmet foods. One of the
items that Harvey sells is a popular mustard that he purchases from an English company. The mustard
costs $10 a jar and requires a 2-month lead time for replenishment of stock. The replenishment time is
constant. Harvey uses a 20% annual interest rate to compute holding costs. Bookkeeping expenses for
placing an order amount to about $50. During the 2-month supply time, Harvey estimates that he sells an
average of 100 jars but there is substantial variation. He estimates the standard deviation of demand for
each 2-month period is 25. Assume that total demand during lead time duration is described by a normal
distribution. (5 + 5 + 5 + 10 + 15 + 20 = 50 points)
a) What is the optimal order quantity?
b) What will be the average time between orders?
c) How much safety stock should be maintained for 98% cycle service level?
d) What should be the reorder point for 98% fill rate?
e) Now suppose that the English company is ready to send the mustard by a faster ship, which will
reduce the replenishment lead time to 1-month and the standard deviation of demand during that period to
17.7, but increase the cost to $15 per jar. What will be the new reorder point for 98% fill rate and 98%
cycle service level, respectively?
f) What will be the optimal total inventory cost (Ordering + Holding + Purchase) before and after the
decrease of lead time under 98% fill rate? What managerial insights can you get from this?